National Company Law Appellate Tribunal
Mr. Shankar Sundaram vs M/S Amalgamations Ltd.Private & Ors on 6 October, 2023
NATIONAL COMPANY LAW APPELLATE TRIBUNAL
AT CHENNAI
TA (AT) No. 18/2021
Company Appeal (AT) No. 325/2019
(IA No. 580/2021 & 191/2022)
(Filed under Section 421 of the Companies Act, 2013)
(Arising out of the Impugned Order dated 18/09/2019 in T.C.P. No. 1/2016
(C.P. No. 94/1999) , passed by the National Company Law Tribunal, Single
Bench, Chennai)
In the matter of :
Mr. Shankar Sundaram
"Mahalakshmi"
25, Kasturi Ranga Road
Chennai - 600 018. ...Appellant
Versus
1. M/s Amalgamations Limited
81, Radhakrishnan Salai
Chennai - 600 004. ....Respondent No. 1
2. A. Sivasailam (deceased)
S/o late S. Anantharamakrishnan
"SUDHARMA"
24, Dr. Radhakrishnan Salai
Chennai - 600 004 ....Respondent No. 2
3. A. Krishnamoorthy
S/o late S. Anantharamakrishnan
"Kalyani Mahal"
No. 1, Sir Sivsamy Salai
Chennai - 600 004 ....Respondent No. 3
4. Simpson & Company Ltd.
861/862, Anna Salai
Chennai - 600 004 .....Respondent No. 4
TA (AT) No. 18 & 114/2021 Page 1 of 104
5. Addisons Paints & Chemical Ltd
Huzur Gardens
Sembium, Chennai - 600 011 ....Respondent No. 5
6. India Pistons Ltd.
"Huzur Gardens"
Sembiam, Chennai - 600 011. .....Respondent No. 6
7. Shardlow India Ltd.
"Huzur Gardens"
Sembiam, Chennai 600 011. ...Respondent No. 7
8. Tractors & Farm Equipment Ltd.,
35, Nungambakkam High Road,
Chennai - 600 034 ....Respondent No. 8
9. Tafe Access Ltd,
35, Nungambakkam High Road,
Chennai - 600 034. ...Respondent No. 9
10. Southern Tree Farms Ltd.
35, Nungambakkam High Road,
Chennai - 600 034. ....Respondent No. 10
11. Associated Publishers (Madras) Ltd.
856, Anna Salai,
Chennai - 600 002 ....Respondent No. 11
12. Bimetal Bearings Ltd.
Strip Mill Plant,
"Huzur Gardens"
Sembiam, Chennai - 600 011. ....Respondent No. 12
13. IP Rings Ltd,
Arjay Apex Centre,
24, College Road, Chennai - 600 006. ...Respondent No. 13
14. Wallace Cartright & Company Ltd.
55/56, St. James Street,
London S.W. 1A 1 LQ. U.K. ....Respondent No. 14
TA (AT) No. 18 & 114/2021 Page 2 of 104
15. W.J. Groom & Company (UK),
55/56, St. James Street,
London S.W. 1A1 LQ. U.K. ...Respondent No. 15
16. Amco Batteries Ltd.,
3rd Floor, Tower Block,
Unity Buildings,
J.C. Road, Bangalore- 560 002. ....Respondent No. 16
17. Amalgamations Valeo Clutch Limited.,
"J" Gardens,
G.N.T. Road, Chennai - 600 010. ....Respondent No. 17
18. TAFE (USA) INC. Memphis,
Tennessee 38117,
U.S.A. ....Respondent No. 18
19. AMCO Power Systems Limited.,
Hebbal-Bellary,
Jakkur Road,
Byadrayampura,
Bangalore - 560 092. ....Respondent No. 19
20. Madras Hi-Tech Circuits Limited,
C-8 & C-9, Madras Export Processing Zone,
MEPS,
Chennai - 600 045. ....Respondent No. 20
21. M/s. R.G.N. Price & Co.
Chartered Accountants,
861, Anna Salai,
Chennai - 600 002. ....Respondent No. 21
22. Mr. S. Balasubramaniam,
Director,
M/s Addisons Paints &
Chemicals Limited,
"Huzur Gardens"
Sembiam,
Chennai - 600 011 ....Respondent No. 22
TA (AT) No. 18 & 114/2021 Page 3 of 104
23. Mr. P.V. Sundaram,
Director,
M/s. Addisons Paints &
Chemicals Limited,
"Huzur Gardens"
Sembiam, Chennai - 600 011 ...Respondent No. 23
24. Mrs. Mallika Srinivasan
Sudharma
128, Radhakrishnan Salai
Chennai 600 004 ....Respondent No. 24
25. Master Sriram, represented by
His father & Natural Guardian
Mr. Murali Venkatraman
Sri Krishna
126, Dr. Radhakrishnan Salai
Mylapore, Chennai 600 004. ....Respondent No. 25
26. Mr. Murali Venkatraman,
Sri Krishna
126, Dr. Radhakrishnan Salai,
Mylapore, Chennai 600 004. ....Respondent No. 26
Present :
For Appellants : Mr. Ravi, Senior Advocate
For Mr. R. Murugan, Advocate
For Respondents : Mr. Krishna Srinivasan, Senior Advocate,
For Ms. Geethi Ara, Advocate
For R1, R3, R4, R6 to R11, R13, R16
Mr Dwarakesh Prabhakaran, Advocate
For R12
Mr. C. Aryama Sundaram, Senior Advocate,
For Mr. Thriyambak Kannan, Advocate
For R24 to R26
WITH
TA (AT) No. 18 & 114/2021 Page 4 of 104
TA (AT) No. 114/2021
Company Appeal (AT) No. 328/2019
(Filed under Section 421 of the Companies Act, 2013)
(Arising out of the Impugned Order dated 18/09/2019 in
T.C.P. No. 88/ 2016 (C.P. No. 20/2012) passed by the National Company
Law Tribunal, Single Bench, Chennai)
In the matter of :
Mr. Shankar Sundaram
"Mahalakshmi"
25, Kasturi Ranga Road
Chennai - 600 018 ....Appellant
Versus
1. M/s. Amalgamations (P) Ltd.,
No. 124, (Old No. 81)
Dr. Radhakrishnan Salai,
Chennai - 600 004. .....Respondent No. 1
2. A. Krishnamoorthy,
'Kalyani Mahal',
No. 1, Sivaswamy Street,
Mylapore, Chennai - 600 004 ....Respondent No. 2
3. N. Venkatramani
'Lakshmi',
No. 12, Boat Club Road,
Chennai - 600 028. ....Respondent No. 3
4. Mallika Srinivasan,
"Westside House"
No. 3, Adyar Club Gate Road,
Chennai - 600 028 ...Respondent No. 4
TA (AT) No. 18 & 114/2021 Page 5 of 104
5. Murali Venkatraman,
'Shrikrishna'
No. 126, Dr. Radhakrishnan Salai,
Mylapore,
Chennai - 600 004 ...Respondent No. 5
6. Sriram Murali,
'Shrikrishna'
No. 126, Dr. Radhakrishnan Salai,
Mylapore,
Chennai - 600 004 ...Respondent No. 6
7. Bhavani Krishnamoorthy,
'Kalyani Mahal'
No. 1, Sivaswamy Street,
Mylapore,
Chennai - 600 004 ....Respondent No. 7
8. Sita Venkatramani,
'Lakshmi', No. 12, Boat Club Road,
Chennai - 600 028 ....Respondent No. 8
9. Anantharamakrishnan Venkatramani,
'Lakshmi', No. 12, Boat Club Road,
Chennai - 600 028 ....Respondent No. 9
10. Gautham Venkatramani,
'Lakshmi', No. 12, Boat Club Road,
Chennai - 600 028. ...Respondent No. 10
11. Lakshmi Narayanan,
'Sreenithi', No. 66, Arts College Road,
Coimbatore - 641 018. ....Respondent No. 11
12. Simpson & Company Limited,
No. 861/862, Anna Salai,
Chennai 600 002 ....Respondent No. 12
TA (AT) No. 18 & 114/2021 Page 6 of 104
13. Addison & Company Limited,
No. 803, Anna Salai,
Chennai 600 002 ....Respondent No. 13
14. Addisons Paints and Chemicals Limited,
Huzur Gardens,
Sembiam, Chennai - 600 011 ...Respondent No. 14
15. Amalgamations Repco Limited,
J. Gardens, GNT Road,
Chennai - 600 110. ....Respondent No. 15
16. Amco Batteries Limited Chennai,
Addison Building,
I Floor, 803, Anna Salai,
Chennai - 600 002 ...Respondent No. 16
17. George Oakes Limited,
43, Greams Road,
Chennai - 600 006. ...Respondent No. 17
18. India Pistons Limited,
Huzur Gardens,
Sembiam, Chennai - 600 011 ....Respondent No. 18
19. IP Pins and Liners Limited,
A1-C, Industrial Estate,
Maramalai Nagar. ....Respondent No. 19
20. Shardlow India Limited,
Huzur Gardens,
Sembiam, Chennai - 600 011. ...Respondent No. 20
21. Simpson & General Finance Co. Ltd,
861-862, Anna Salai,
Chennai - 600 002. ....Respondent No. 21
22. Sri Rama Vilas Service Ltd,
861-862, Anna Salai,
Chennai - 600 002 ...Respondent No. 22
TA (AT) No. 18 & 114/2021 Page 7 of 104
23. Tractors and Farm Equipment Ltd.,
861, Annasalai, Chennai - 600 002 ...Respondent No. 23
24. Tafe Motors Tractors Ltd,
35, Nungambakkam High Road,
Chennai - 600 034 ...Respondent No. 24
25. Tafe Access Ltd,
35, Nungambakkam High Road,
Chennai - 600 034 ...Respondent No. 25
26. Southern Tree Farms Ltd,
35, Nungambakkam High Road, Nungambakkam,
Chennai - 600 034 ...Respondent No. 26
27. Tafe Reach Ltd,
35, Nungambakkam High Road,
Nungambakkam,
Chennai - 600 034 ...Respondent No. 27
28. Tal Precision Parts Ltd,
35, Nungambakkam High Road,
Nungambakkam,
Chennai - 600 034 ...Respondent No. 28
29. T. Stanes and Company Ltd,
8/23-24, Race Course Road,
Coimbatore - 641 018 ...Respondent No. 29
30. Stanes Motors (South India) Ltd,
8/23-24, Race Course Road,
Coimbatore - 641 018 ...Respondent No. 30
31. Stanes Motor Parts Ltd,
8/23-24, Race Course Road,
Coimbatore - 641 018 ...Respondent No. 31
TA (AT) No. 18 & 114/2021 Page 8 of 104
32. Stanes Agencies Ltd,
8/23-24, Race Couse Road,
Coimbatore - 641 018 ...Respondent No. 32
33. Stanes Amalgamated Estates Ltd,
8/23-24, Race Course Road,
Coimbatore - 641 018 ...Respondent No. 33
34. Wheel and Precision Forgings India Ltd,
Huzur Gardens,
Sembiam, Chennai - 600 011 ...Respondent No. 34
35. Associated Publishers (Madras) P Ltd,
No. 114, Anna salai,
Chennai - 600 002. ...Respondent No. 35
36. Associated Publishers (M) P Ltd,
856, Anna Salai,
Chennai - 600 002 ...Respondent No. 36
37. Bimetal Bearings Ltd,
Huzur Gardens,
Sembiam, Chennai - 600 011 ...Respondent No. 37
38. BBL Daido Private Ltd,
861, Anna Salai,
Chennai - 600 002 ...Respondent No. 38
39. Higginbothams Private Ltd
No. 116, Anna Salai,
Chennai - 600 002 ...Respondent No. 39
40. IP Rings Ltd,
Arjay Apex Centre,
51/24, College Road,
Chennai - 600 002 ...Respondent No. 40
41. Speed-A-Way Private Ltd,
No. 207, Anna Salai,
Chennai - 600 002 ...Respondent No. 41
TA (AT) No. 18 & 114/2021 Page 9 of 104
42. The Madras Advertising Company P Ltd,
861, Anna Salai,
Chennai - 600 002 ...Respondent No. 42
43. L.M. Van Moppes Diamond Tools India P Ltd., Chennai
861, Anna Salai,
Chennai - 600 002 ....Respondent No. 43
44. Wallace Cartwright and Co. Ltd.
UK, 55-56 St. James Street,
Greater London,
SW 1A 1LQ. ....Respondent No. 44
45. Tafe International Traktor Ve Tarim,
Organize San. Bol.4.Kisim OSB 410.
No. 24, 45020 Merkez Manisa,
Sirketi,
Turkey. ...Respondent No. 45
46. IPL Engine Components P Ltd,
51/24, College Road,
Chennai - 600 006. ...Respondent No. 46
47. Tafe USA inc,
1014 Highway 348
West Guntown,
MS 38849, USA. ....Respondent No. 47
48. WJ Groom & Co Ltd
No. 60,
St. James Street,
London, SW1A 1LQ, E17, 7PE. ....Respondent No. 48
TA (AT) No. 18 & 114/2021 Page 10 of 104
Present :
For Appellants : Mr. Ravi, Senior Advocate
For Mr. R. Murugan, Advocate
For Respondents : Mr. Krishna Srinivasan, Senior Advocate,
For Ms. Geethi Ara, Advocate
For R1, R2, R7 to R13, R15 to R27, R29 to R36, R39
to R43 & R46
Mr. Dwarakesh Prabhakaran, Advocate
For R37
Mr. C. Aryama Sundaram, Senior Advocate,
For Mr. Thriyambak Kannan, Advocate
For R24 to R26
JUDGMENT
(Virtual Mode) [Per: Shreesha Merla, Member (Technical)]
1. Challenge in these Appeals TA No. 18/2021 and TA No. 114/2021 in Company Appeal (AT) No. 325/2019, and in Company Appeal (AT) No. 328/2019 respectively under Section 421 of the Companies Act, 2013 (hereinafter referred to as the 'Act) is to the common Impugned Order dated 18/09/2019 in TCP No. 1/2016 (CP No. 94/1999) and TCP No. 88/2016 (CP No. 20/2012) passed by the National Company Law Tribunal, Chennai Bench, by which common Order, the NCLT has dismissed both the Company Petitions, as devoid of merit.
2. At the outset, a brief history of the various Orders and the reliefs prayed for are being detailed as hereunder for better understanding of the case. The TA (AT) No. 18 & 114/2021 Page 11 of 104 reliefs prayed for in Company Petition TCP No. 1/2016 filed by Mr. Shankar Sundaram against 26 Respondents seeking to implead another 21 Respondents, are detailed as hereunder:
a) "Appointment of an independent Administrator to take charge of the affairs of the first respondent, Amalgamations Ltd.
This will be necessary to regulate the conduct of the first respondent and affairs in future as stipulated under Section 402 (a);
b) To terminate the appointment of the second respondent as Chairman/Director of the first respondent and also the Chairman and Managing Director of TAFE Ltd.
c) To terminate the appointment of Mr. S. Balasubramaniam and Mr. P.V. Sundaram as Directors of Addisons Paints and Chemicals Ltd; and to appoint an independent Chairman and two nominee Directors including Sri K.S. Sundaram (the petitioner's father) to the Board of Directors of Addisons Paints and Chemicals Ltd..;
d) To appoint the petitioner as a Director on the Board of the 1st respondent and entrust him with an office of profit in one of the larger profit making subsidiary companies of the 1st respondent commensurate with the educational qualifications and work experience on an equal footing with the other members, currently working, in the AL Group.
e) To order for an independent investigation into the foreign operations of the Amalgamations Ltd.
f) To direct the second and third respondents to give detailed accounts, commission received TA (AT) No. 18 & 114/2021 Page 12 of 104 and other benefits received from the first respondent and or other companies of the group and to account and hold the same for the benefits of the other shareholders of the company;
g) To issue directions to forthwith stop payment of commission to the second and third respondent which are wholly unjustified and amount to unjust enrichment at the expense of other members.;
h) To prepare a scheme of administration to regulate and conduct of the affairs of Addisons Paints and Chemicals Ltd. in future so as to ensure that this company is able to revive and regain its profitable status at the earliest and in particular, providing for voluntary retirement scheme, Y2K complaint, provision of adequate working capital and long term funds and direct other concerns of Amalgamations Group to purchase requirements of paint products from Addisons Paints and Chemicals Limited (5th respondent)
i) To declare that the affairs of the first respondent company and its subsidiaries as mentioned in the cause title are to be investigated by an Inspector or Inspectors in terms of Section 235 of the Act.
j) For such further or other reliefs as this Hon'ble Company Law Board may deem fit in the facts and circumstances of the case."
3. The Interim reliefs sought for in TCP No. 1/2016 are as follows:
a) "Immediate direction to the first respondent to take steps to provide adequate working capital of Rs. 5 Crores to Addisons Paints and Chemicals Ltd.;TA (AT) No. 18 & 114/2021 Page 13 of 104
b) To convene a Board Meeting of that Company to ensure Y2K compliance;
finalise VRS Scheme and Foreign Collaboration with NOF Corporation, Japan;
c) To direct the 5th respondent to obtain on job work/out-source such of those paint products wherein the cost of production exceeds the nett sales realisation.
d) To direct TAFE (8th respondent) to purchase their requirements of paints from the 5th respondent as per the earlier prevailing practice of the Amalgamations Group.
e) To appoint the petitioner as a Director on the Board of the 1st respondent and entrust him with an office of profit in one of the larger profit making subsidiary company of the 1st respondent commensurate with the educational qualifications and work experience on an equal footing with the other members currently working in the AL Group.
f) Appointment of Chartered Accountant to investigate accounts of Amalgamations Ltd., India Pistons, Bimetal Bearings, TAFE etc. where serious discrepancies as mentioned in para 6.5 above have been pointed out.
g) To restrain the statutory auditor of the first and fourth respondents (M/s R.G.N. Price & Co.) from functioning as the Auditors of the aforesaid companies.
h) For such or other reliefs that this Hon'ble Company Law Board may deem fit in the facts and circumstances of the case."
TA (AT) No. 18 & 114/2021 Page 14 of 104
4. The reliefs sought for in TCP No. 88/2016 filed by Mr. Shankar Sundaram against 48 Respondent Companies are hereunder:
A. "Direct the 1st Respondents and its Board of Directors comprising of Respondents 2 and 3 to restructure the Boards of the Subsidiaries that are Respondents 12 to 48 in an appropriate manner so that the package of remuneration, including commissions, etc., payable to their whole time and non-whole time Directors are equitably and more or less equally distributed among and paid to the members of all the four branches of the Family of Late Anantharamakrishnan as set out in the Family Tree that is Annexure 4;
B. Alternatively, direct the Respondents to buy out the shares held by the Petitioner, including what he might get consequent upon the final judgment in C.S. No. 727 of 2001 on the file of the Hon'ble High Court, Madras at the fair market value based on the Net worth of the 1st Respondent and all the Subsidiaries of the 1st Respondent.
C. Direct the Respondents to pay to the Petitioner any reasonable sum as this Hon'ble Board might determine as compensation for the loss of revenue that would have accrued to his benefit since the death of his grandfather Anantharamakrishnan but for the discriminatory treatment meted out to him by the majority shareholders all these years;
D. Declare that the affairs of the Respondents 12 to 48, both inclusive, require to be investigated.
E. Pass such further or other orders as may be required and deemed fit and proper under the TA (AT) No. 18 & 114/2021 Page 15 of 104 facts and circumstances of the case and thus render full justice."
5. The Interim Orders sought in TCP No. 88/2016 are as follows:
A. "Grant an injunction restraining the Respondents 1 and 12 to 48 from disbursing any salary, remuneration or commission to any of the other Respondents herein without getting the prior sanction of this Hon'ble Board and in excess of what this Board might fix as reasonable pending disposal of the main C.P. B. Direct the Respondents to nominate the Petitioner to a post of profit in any one of the Profit making Subsidiaries among the Respondents 12 to 48, and fix a reasonable remuneration for such post matching those that are fixed for the other Respondents herein pending disposal of the main C.P. C. Pass such further or other orders as may be required and deemed fit and proper under the facts and circumstances of the case and thus render full justice."
6. The Company Law Board Principal Bench in the matter of 'Shankar Sundaram Vs. Amalgamations Limited' in CA No. 48/2000 in CP No. 94/1999, dated 18/10/2000 observed that the Company has 38 subsidiaries and some of the subsidiaries are in turn 'Holding Companies' of other 'Subsidiaries' and in that Company Petition the Petitioner had arrayed 17 subsidiaries as Respondents and had sought reliefs against some of the subsidiaries in terms of Section 402 of the Companies Act, 1956. It was observed that the Petitioner other than holding 10% TA (AT) No. 18 & 114/2021 Page 16 of 104 shares in the Company does not hold any shares in any of the subsidiaries except in one. In that background, the first Respondent Company as well as some of the Respondent subsidiaries have questioned the maintainability of the Petition against the subsidiaries in as much as the Petitioner does not fulfil the requirements of Section 399 of the Act as far as these subsidiaries are concerned. The Respondents had sought for deciding the issue as a preliminary issue before considering the Petition on merits. The Company Law Board (CLB) while deciding the preliminary issue had deleted the names of all the subsidiaries and their Directors from the array of Parties. The CLB directed the first Respondent Company which had reserved its Rights to file a detailed Reply to file its Reply on the allegations in the Petition including those in respect of its dealings with the subsidiaries, by December 1, 2000 and thereafter the Company Law Board had proceeded to give the dates for Hearing. Thereafter, the Hon'ble High Court of Madras in CMA No. 2018/2000 and CMP No. 19428/2000 dated 03/06/2002 in the matter of 'Shankar Sundaram Vs. Amalgamations Ltd. & 22 Ors' [(2002 (3) CTC 751] has held as follows:
"The Company Law Board has ordered deletion of the names of other respondents, viz., directors of some of the companies for the reasons given for the deletion of the names of the subsidiaries. As regards the deletion of the names of the respondents 2 and 3, the Company Law Board has not given any independent reason. Since that part of the order of the Company Law Board directing deletion of the names of the subsidiary companies who were arrayed as respondents in the company petition is liable to be set aside, that part of the TA (AT) No. 18 & 114/2021 Page 17 of 104 order of the Company Law Board directing deletion of the names of respondents 2 and 3 and the directors of some of the companies is also liable to be set aside. I therefore set aside that part of the order of the Company Law Board directing deletion of the names of the respondents 2 to 23 from the array of parties in the company petition and set aside the observations made by the Company Law Board as against the respondents 5 and 8 and also set aside the adverse observations made by the Company Law Board against the appellant in the order under challenge. In other words, the appeal stands allowed. The appellant would be entitled to costs of a sum of Rs. 10,000. Consequently, connected C.M.P. No. 19428 of 2000 is closed."
7. The Hon'ble High Court of Madras in 'Amalgamations Limited Vs. Shankar Sundaram' in LPA Nos. 129-131/2002 and CMP Nos. 8586, 8588, 8602, 8605/2002 and CMP Nos. 413, 414, 415 & 416/2011 has observed in Paras 39 , 48, 49, 50, 51 as follows:
39. In fact, the Company Law Board relied upon the decision reported in Hungford case and rightly arrived at a conclusion that it will be improper and illegal to join subsidiaries in the Company application on facts and circumstance of the case. But the Company Law Board has held that the main Company Petition under Section 397 of the Act is not demurable or objectionable in the absence of subsidiary Companies and their directors and share holders and in appropriate case, they would come under the expression affairs of the Company meaning the affairs of the holding Company" Further, it was also held that "Therefore, when a person is not a member of a Company, his alleging oppression and invoking the provisions of Section 397 against that Company does not arise. Therefore, a shareholder TA (AT) No. 18 & 114/2021 Page 18 of 104 of a holding Company cannot complaint of oppression by a subsidiary in which he is not a member as there is no legal relation between him and the subsidiary Company."
.......
48. The Company Law Board has rightly concluded that the Company Petition is essentially a Petition against the holding Company. Therefore the Company Law Board found that without even going into the merits of the case and ordering investigation into the affairs of the holding Company, the Court cannot definitely order for investigation into the affairs of the subsidiary Companies. In fact, if it is found, after hearing the Petition that the order of investigation can be made into the affairs of the holding Company, then the provisions of Section 239, would come into play and it is for the inspectors, to be appointed by the Central Government, to decide as to whether the business of the subsidiary also required to be investigated. In fact, this has been held by the Division Bench of this Court in the decision reported in Micromeritics Engineers Pvt. Ltd. v. S. Munusamy, 2004 (122) Company Cases 150 also, which is mentioned supra. Therefore, we hold that the Company Law Board has rightly stated that there need not be any direction and gave liberty to the Respondent in case the Respondent desires that there should be a direction for investigation into the affairs of any of the subsidiary Company, it is always open to him to file separate applications in terms of Section 214(2) read with Section 235 of the Act. When this safeguard was given by the Company Law Board, it is not open for the Respondent, at this stage, to contend that because the Company application filed by him is a combined application, it has to be taken up together along with the main Company Petition when he has not complied with Section 399(4) of the Act.TA (AT) No. 18 & 114/2021 Page 19 of 104
49. In any view of the matter, as we have found that the Respondent has not even made any allegations against the subsidiary Company or claimed any relief against most of the subsidiary Companies in the main Company Petition and as per the decisions of the Honourable Supreme Court mentioned supra, the subsidiary Companies cannot be included in the Company Petition.
Hence, the order passed by the learned Single Judge, setting aside the order of the Company Law Board deleting the subsidiary Companies from the array of parties, is not correct. Inasmuch as the subsidiary Company cannot be made as a party to the Company Petition, we are inclined to allow LPA Nos. 129 & 131 of 2002.
50. At the same time, in so far as LPA No. 130 of 2002 is concerned, which is filed by the holding Company challenging that portion of the order of the Company Law Board rejecting certain preliminary objections raised by the Appellant and against the order of the Company Law Board in not dealing with certain preliminary objections raised by the Appellant and against certain directions given by the Company Law Board, as rightly pointed out by the learned Single Judge, the Company Law Board has not made any error in recognising the statutory right of the Respondent herein under Law to file a Petition under Section 214(2) read with Section 235 of the Act. Further, in view of the fact that we have categorically held that the order of the Company Law Board ordering to delete the names of the subsidiary Companies from the array of parties in the Company Petition and permitting the holding Company to file objections relating to the objections made against them is valid, we do not find any reason to interfere with the order passed by the learned Single Judge in C.M.A. No. 2036 of 2002 and therefore, the relief sought for in LPA No. 130 of 2002 cannot be granted.
51. In the result, we allow LPA Nos. 129 & 131 of 2002 by setting aside the order dated TA (AT) No. 18 & 114/2021 Page 20 of 104 3.6.2002 passed by the learned Single Judge in C.M.A. No. 2018 of 2000 and restore the order passed by the Company Law Board deleting the names of the subsidiary Companies from the array of parties from the Company Petition No. 48 of 2000. Consequently, we dismiss the LPA No. 130 of 2002 by confirming the order dated 3.6.2002 passed by the learned Single Judge in C.M.A. No. 2036 of 2000. However, there shall be no order as to costs. Connected miscellaneous Petitions are closed.
8. On an Appeal, before the Hon'ble Apex Court by Mr. Shankar Sundaram, the Hon'ble Supreme Court in Civil Appeal Nos. 4574-4575/2017, disposed of the Appeals observing as hereunder:
"Leave granted.
We have heard the learned counsel appearing for the appellant and Mr. Shyam Divan and Mr. C.A. Sundaram, learned Senior counsels appearing for the respondents at length.
After having heard the learned counsel/learned Senior counsel appearing for the parties and carefully perusing the material available on record, we are of the view that the matters can be disposed of by referring the disputes to the National Company Law Tribunal.
The appellant shall have the right to take all points including the point of tearing of the corporate veil so far as the Section 397/398 Petition is concerned.
Further, the subsidiary companies against whom the appellant has not made any allegations in the Petition and no relief has been sought for against need not be added as parties. However, Respondent Nos. 8, 9, 13, 14, 16, 17 and 18 and Respondent Nos. 4 and 7 should be added as parties and the appellant shall be at liberty to argue on the grounds in the said Petition and the TA (AT) No. 18 & 114/2021 Page 21 of 104 prayer regarding the alleged mis-management of the companies in question in case the corporate veil is lifted. The Section 397/398 Petition is maintainable as the appellant holds 10% of the share capital in the holding company. The High Court is not correct in saying that the subsidiary companies above mentioned should be struck from the array of parties as, if the corporate veil is lifted, the holding and subsidiaries companies will be -2- regarded as one and the same for the purpose of granting relief in the said Petition. The High Court Judgment is upheld insofar as it treats the Company Petition as being under Section 397/398 and not Section 235 of the Companies Act, 1956.
We further make it clear that the National Company Law Tribunal shall deal with and decide the case independently and in accordance with law, without being influenced by any observation made by the High Court in the matter.
The Appeals are disposed of in the afore- stated terms."
(Emphasis Supplied) ISSUE OF REMUNERATION, DIVIDENDS & QUASI-PARTNERSHIP
9. At the outset, the first issue raised by the Learned Senior Counsel for the Appellant is that equal rights were denied to equal inheritors, which is argued to be an act of oppression against the Appellant. It is submitted that Mr. Ananta Ramakrishnan was owning the entire 100 % shares in the first Respondent Company when he died intestate on 18/04/1964 and all his shares were devolved equally among his five legal heirs namely, his wife, his two sons and his two daughters, one of whom was the Appellant's mother. The Learned Senior Counsel drew our attention to the family tree for better understanding of the shareholding pattern.
TA (AT) No. 18 & 114/2021 Page 22 of 104TA (AT) No. 18 & 114/2021 Page 23 of 104 TA (AT) No. 18 & 114/2021 Page 24 of 104
10. It is the case of the Appellant that having equally inherited all the shares, the legal heirs had become equal partners of the first Respondent Company with equal rights and in the absence of any specific component in the Articles of the Company or any other Agreement contrary to this position, the Appellant ought to have been given equal rights. After the demise of the Appellant's grandfather, the sons were inducted into the Board and started managing the Company while Auditors were kept out of the Board. It is submitted that the Appellant's grandmother Mrs. Valli Ananthakrishnan expired on 31/05/1977 and her 20 % shares were transferred to the joint names of the two sons who claimed that their mother had gifted her shares to certain family trust and that both of them were Joint Trustees. It is submitted that gifting shares to Trust is not permissible in view of the restrictions in Articles 16 & 17 of the first Respondent Company specifically, Article 17 (j), which reads as follows: -
(j) Subject as aforesaid in regulation 17 (k) hereof, a member may, by way of gift, or for or without any pecuniary consideration, transfer any share in the capital of the company to the wife or husband of such member, or to a son, daughter, father, mother, grandfather, brother, sister, nephew or niece of such member, or to the wife or husband of any person standing in such relationship to the transferring member as aforesaid. And any share of a deceased member may, subject as mentioned in regulation 17(k) hereof, be transferred by his executors or administrators to any person to whom such deceased member may have specifically bequeathed the same, such person standing in one of the relationships to such deceased member, namely widow or widower, son, daughter, brother, sister, nephew or niece or wife or husband of any person TA (AT) No. 18 & 114/2021 Page 25 of 104 standing in any such relationship to the deceased member.
11. It is the case of the Appellant that the first Respondent owns and controls several direct and stepdown subsidiaries (38, out of which only 21 are profit making Companies). The Learned Senior Counsel drew our attention to the direct subsidiaries of 'Amalgamations', which 'Table', for better understanding of the case is reproduced as hereunder:
TA (AT) No. 18 & 114/2021 Page 26 of 104
12. It is pointed out that out of the 21 profit making Companies, three companies constituted more than 97 % of the total profit of the Group namely, Simson and Company Limited, TAFE and TMTL. It is stated that after adding the 20 % shares of the Appellant's grandmother, Mr. Sivasailam and Mr. Krishnamoorthy claimed majority power and control the affairs of the Company keeping the two sisters in the dark and appointing themselves to directorial positions in the subsidiary and fix their own remunerations for themselves, increasing the total remuneration and commission from Rs. 2,00,00,000/- in the year 1997-98 to Rs. 1830000000/- by 2012, which is around Rs. 16,00,00,000/- on an average. It is submitted that by 2018 the said amount escalated to Rs. 512.25 Crores which is an average of Rs. 52 Crores p.a. and that today it has crossed Rs. 850 Crores, the average being Rs. 100 Crores p.a. It is the case of the Appellant that Mr. Sivasailam and his two daughters namely Mallika Srinivasan and Jayshree Venkatraman and his granddaughter Lakshmi Venu along with Mr. Krishnamoorthy had appropriated Rs. 478.88 Cores; Seetha Venkatraman's husband and sons Rs. 26.33 Crores, while the Appellant's sister Lakshmi Narayanan got Rs. 7.04 Crores. During this entire period the Appellant was never given any position or remuneration / Commission exhibiting disparity and discrimination.
13. It is submitted that the contention of the Respondents that all such remuneration and commission are well within the maximum limits permitted TA (AT) No. 18 & 114/2021 Page 27 of 104 under the Companies Act, 1956 is no justification for such discrimination and that such an act is an oppressive one.
14. The Learned Counsel for the Appellant also placed reliance on para 49 of the Judgment of the Hon'ble Apex Court in the matter of 'Needle Industries (India) Limited and Ors. Vs. Needle Newey (India) Holding Limited and Ors.' Reported in [(1981) 3 SCC 333] wherein a three Judge Bench of the Hon'ble Supreme Court has observed as follows:
"49. The question sometimes arises as to whether an action in contravention of law is per se oppressive. It is said, as was done by one of us, Bhagwati, J., in a decision of the Gujarat High Court in Seth Mohanlal Ganpatram v. Sayaji Jubilee Cotton & Jute Mills Co. Ltd. [(1964) 34 Com Cas 777 : AIR 1965 Guj 96 : (1964) 5 Guj LR 804] that "a resolution passed by the directors may be perfectly legal and yet oppressive, and conversely a resolution which is in contravention of the law may be in the interests of the shareholders and the company". On this question.
Lord President Cooper observed in Elder v. Elder [1952 SC 49] :
"The decisions indicate that conduct which is technically legal and correct may nevertheless be such as to justify the application of the "just and equitable" jurisdiction, and, conversely, that conduct involving illegality and contravention of the Act may not suffice to warrant the remedy of winding up, especially where alternative remedies are available. Where the "just and equitable" jurisdiction has been applied in cases of this type, the circumstances have always, I think, been such as to warrant the inference that there has been, at least, an unfair TA (AT) No. 18 & 114/2021 Page 28 of 104 abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy."
Neither the judgment of Bhagwati, J. nor the observations in Elder [1952 SC 49] are capable of the construction that every illegality is per se oppressive or that the illegality of an action does not bear upon its oppressiveness. In Elder [1952 SC 49] a complaint was made that Elder had not received the notice of the Board meeting. It was held that since it was not shown that any prejudice was occasioned thereby or that Elder could have bought the shares had he been present, no complaint of oppression could be entertained merely on the ground that the failure to give notice of the Board meeting was an act of illegality. The true position is that an isolated act, which is contrary to law, may not necessarily and by itself support the inference that the law was violated with a mala fide intention or that such violation was burdensome, harsh and wrongful. But a series of illegal acts upon one another can, in the context, lead justifiably to the conclusion that they are a part of the same transaction, of which the object is to cause or commit the oppression of persons against whom those acts are directed. This may usefully be illustrated by reference to a familiar jurisdiction in which a litigant asks for the transfer of his case from one Judge to another. An isolated order passed by a Judge which is contrary to law will not normally support the inference that he is biased; but a series of wrong or illegal orders to the prejudice of a party are generally accepted as supporting the inference of a reasonable apprehension that the Judge is biased and that the party complaining of the orders will not get justice at his hands."
(Emphasis Supplied) TA (AT) No. 18 & 114/2021 Page 29 of 104
15. In support of his submissions regarding such acts of oppression, Learned Senior Counsel placed reliance on the Judgment in the matter of 'JM Housing Limited & Ors. Vs. Mr. Surender Kumar Gupta & Ors.' in Company Appeal (AT) No. 182/2020, in which it is held as follows:
"55. It is to be pointed out that the Tribunal as per Section 241 of the Companies Act, 2013 has wide powers to grant relief in cases of oppression etc. It can pass interim orders pertaining to the functioning of the Company in case of oppression and mismanagement. Apart from that, the Tribunal has discretion in moulding the relief even when the concerned petitioner fails to make out a case of an oppression and mismanagement. The Tribunal has to weigh equitable considerations, to be super imposed on legal rights. However, whether an act is an oppressive one or not is basically a question of fact.
56. Undoubtedly, the Tribunal has power to decide whether a particular transaction is a bonafide one entered into in the ordinary course of business without notice of any internal squabbles of the Directors of a Company. In a petition u/s 241 of the Companies Act, 2013 (i) materials ought to be supplied (ii) figures are to be furnished (iii) the allegations are to be proved.
57. Be it noted, that every illegal act may not be oppressive, some illegal acts can be considered oppressive depending upon the facts of the case. The Companies Act provides a remedy to the minority shareholders against oppression by majority shareholders by their continuous acts. The legality or illegality of an act has nothing to do with an oppressive or non-oppressive act and, therefore, the Tribunal must examine the facts of each case."
(Emphasis Supplied) TA (AT) No. 18 & 114/2021 Page 30 of 104
16. It is argued by the Learned Senior Counsel that R1 Company holds almost 100 % shares in Simpson and Company Limited and is managed by Krishnamoorthy and Venkataramani and this Simpson Company holds more than 76 % shares in TAFE which shows that R1 Company controls the AGM of TAFE. Similarly, TAFE holds 100 % shares in TMTL and is therefore, ultimately controlled by a majority of R1 Company. It is the case of the Appellant that all appointments of Directors to the subsidiaries are made only by the Board of R1 Company which is dominated by the majority shareholders who have self- appointed themselves and fixed their own remuneration, excluding the Appellant, which is an act of disparity, discrimination and 'oppression'.
17. It is submitted that the Appellant in C.P. 20/2012, complained of several acts of 'oppression and mismanagement' mainly stating that Mr. A. Sivasailam and Mr. A. Krishnamurthy using the majority power usurped by them, placed themselves and their kith and kin in posts of profit in the subsidiaries and fixed unjustifiably exorbitant remuneration for such posts and in this process a major chunk of the profits earned by the subsidiaries was fritted away towards such high remuneration and only a meagre portion of the real profits earned by the subsidiaries were reflected in the books of the 1st Respondent Company as profits, dividends, interests etc. It is argued that the dividends were declared to the members of the 1st Respondent Company and paid only on such meagre profits. It is submitted that had the management acted fairly and not siphoned off a major TA (AT) No. 18 & 114/2021 Page 31 of 104 portion of the profit the dividends would have been much more and this is a clear fraud on the majority. There is no reason given for not giving an equal opportunity to the Appellant in the group Companies under the control of the 1 st Respondent to earn remuneration and commission on par with the others. It is submitted that even after the death of AS in the year 2011, his daughter Mallika Srinivasan continued to act in the same style and manner, appointing her daughter as the Director of the Subsidiary and fixing here remuneration and commission as high as Rs. 6,00,00,000/-.
18. The Learned Senior Counsel for the Respondents submitted that the remuneration fixed for the Directors is entirely justified considering the financial performance of these Companies and drew our attention to the summary of the financial position of the preceding three financial years of the following companies:
TA (AT) No. 18 & 114/2021 Page 32 of 104
19. Drawing our attention to the figures not only of Simpson and Company Ltd., TAFE, Learned Senior Counsel referring to the net profit figures of M/s Amalgamations Pvt. Ltd. contended that by no stretch of imagination can it be stated that the said Company is mismanaged. It is argued that the Appellant seeks a management role only in the larger profit-making subsidiaries as can be seen from their Prayer in both the Company Petitions.
20. The Learned Senior Counsel for the Appellant had placed reliance on Paras 51 and 52 of 'Needle Industries India Limited' (Supra) in support of his argument that the affairs of the Company were being conducted continuously in an oppressive manner in the light of his allegations that there is continuous usurping of profits by way of excessive remuneration. The said Paras 51 and 52 read as hereunder:-
"51. In Kalinga Tubes [(1965) 2 SCR 720, 737 :
AIR 1965 SC 1535] Wanchoo, J. referred to certain decisions under Section 210 of the English Companies Act including Meyer [1959 AC 324 : (1958) 3 All ER 66 (HL)] and observed:
"These observations from the four cases referred to above apply to Section 397 also which is almost in the same words as Section 210 of the English Act, and the question in each is whether the conduct of the affairs of a company by the majority shareholders was oppressive to the minority shareholders and that depends upon the facts proved in a particular case. As has already been indicated, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of Section 397. It must further be TA (AT) No. 18 & 114/2021 Page 33 of 104 shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. It is in the light of these principles that we have to consider the facts . . . with reference to Section 397." (p. 737) At pp. 734-35 of the judgment in Kalinga Tubes [(1965) 2 SCR 720, 737 : AIR 1965 SC 1535] Wanchoo, J. has reproduced from the judgment in Meyer [1959 AC 324 : (1958) 3 All ER 66 (HL)] the five points which were stressed in Elder [1952 SC 49] . The fifth point reads thus:
The power conferred on the court to grant a remedy in an appropriate case appears to envisage a reasonably wide discretion vested in the court in relation to the order sought by a complainer as the appropriate equitable alternative to a winding-up order.
52. It is clear from these various decisions that on a true construction of Section 397, an unwise, inefficient or careless conduct of a Director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which TA (AT) No. 18 & 114/2021 Page 34 of 104 lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder. It may be mentioned that the Jenkins Committee on Company Law Reform had suggested the substitution of the word "oppression" in Section 210 of the English Act by the words "unfairly prejudicial" in order to make it clear that it is not necessary to show that the act complained of is illegal or that it constitutes an invasion of legal rights (see Gower's Company Law, 4th Edn., p.
668). But that recommendation was not accepted and the English law remains the same as in Meyer [1959 AC 324 : (1958) 3 All ER 66 (HL)] and in Re H.R. Harmer Ltd. [1959 WLR 62 :
(1958) 3 All ER 689 (CA)] as modified in Re Jermyn St. Turkish Baths [(1971) 3 All ER 184 (CA)] . We have not adopted that modification in India."
(Emphasis Supplied)
21. The Learned Senior Counsel for the Respondent differentiated the principles laid down in 'Needle Industries India Limited' (Supra) stating that the person complaining of oppression must show that he has been constrained to submit to a 'Conduct' which lacks in probity, 'Conduct' which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary Rights as a Shareholder, and that in the instant case, there is no unfairness or prejudice caused to the 'Member' in exercise of his legal and propriety rights as a Shareholder. Both the Counsels relied on the principle laid down in the matter of 'V.S. Krishnan Vs. Westfort high-tech Hospital' reported in 2008 3 SCC, in which Judgment the Hon'ble Apex Court has observed as follows: TA (AT) No. 18 & 114/2021 Page 35 of 104
"In a number of judgments, this Court considered in extenso the scope of Sections 397 and 398. The following judgments could be usefully referred to:
(a) Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [(1981) 3 SCC 333]
(b) M.S. Madhusoodhanan v. Kerala Kaumudi (P) Ltd. [(2004) 9 SCC 204]
(c) Dale and Carrington Investment (P) Ltd. v. P.K. Prathapan [(2005) 1 SCC 212]
(d) Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [(2005) 11 SCC 314]
(e) Kamal Kumar Dutta v. Ruby General Hospital Ltd. [(2006) 7 SCC 613] From the above decisions, it is clear that oppression would be made out:
(a) Where the conduct is harsh, burdensome and wrong.
(b) Where the conduct is mala fide and is for a collateral purpose where although the ultimate objective may be in the interest of the company, the immediate purpose would result in an advantage for some shareholders vis-à-vis the others.
(c) The action is against probity and good conduct.
(d) The oppressive act complained of may be fully permissible under law but may yet be oppressive and, therefore, the test as to whether an action is oppressive or not is not based on whether it is legally permissible or not since even if legally permissible, if the action is otherwise against probity, good conduct or is burdensome, harsh or TA (AT) No. 18 & 114/2021 Page 36 of 104 wrong or is mala fide or for a collateral purpose, it would amount to oppression under Sections 397 and 398.
(e) Once conduct is found to be oppressive under Sections 397 and 398, the discretionary power given to the Company Law Board under Section 402 to set right, remedy or put an end to such oppression is very wide.
(f) As to what are facts which would give rise to or constitute oppression is basically a question of fact and, therefore, whether an act is oppressive or not is fundamentally/basically a question of fact."
22. It is the case of the Respondents that their action is not against probity and that the oppressive act complained of is fully permissible under the Law and that the conduct is neither harsh nor burdensome. It is seen from the aforenoted Judgment that it has followed the Law laid down in 'Needle Industries India Limited' (Supra). The Learned Counsel for the Respondent relying on the same Judgment drew our attention to Para 37, stating that 'unfairness' does not constitute 'oppression'. The relevant para is reproduced as hereunder:
"As rightly pointed out that CLB missed a most basic principle of Section 397, namely, that mere unfairness does not constitute oppression. When the petitioners were given the right to subscribe to the "rights issue" along with all others in the same proportion, no prejudice, whatsoever, could have been caused to them. It is not in dispute even by the petitioners that the need for more funds was an admitted position. In Needle Industries [(1981) 3 SCC 333] this Court has pointed out if there is a need for funds the fact that the Directors have incidentally enriched themselves would not entail TA (AT) No. 18 & 114/2021 Page 37 of 104 a court to set aside the issue of shares. In fact, no unfair prejudice has been caused to the petitioners. CLB failed to take note of all these vital aspects and relied on irrelevant materials. Apart from these, it is pointed out that the Company having turned the corner and doing well, it would be fair exercise of discretion by this Court not to interfere with the High Court judgment."
23. It is the further case of the Appellant that the principle laid down in 'Vasudev P. Hanji Vs. Ashok Ironworks' reported in (2008) 145 Company Cases 797 is applicable to the facts of this case. It is a Company Law Board Case and though not binding, this Tribunal, on a brief perusal of the matter observed that it was a case of conversion of partnership to a Company; that the profits of the business were being shared in the ratio of 25:75 in a family arrangement; that there was no dividend payable at all. It is distinguishable as Simpson, TAFE and TMPL are all Public Companies and no remuneration can be drawn beyond 11 % of the net profits in accordance with Law. In the instant Case, the Appellant has been receiving dividend but it is his grievance that the dividend is not at par with the other Shareholders.
24. At this juncture, to ascertain whether the Appellant was being paid dividend and whether he had approved the same while attending the Annual General Meetings, the said statement showing the proposals of the various Annual General Meetings of the first Respondent Company is reproduced as hereunder:
TA (AT) No. 18 & 114/2021 Page 38 of 104 TA (AT) No. 18 & 114/2021 Page 39 of 104
25. It is seen from the aforenoted statement that the AGMs were conducted periodically and they were all attended by the Appellant right from 1984 to 1999 and the Appellant had approved the 'proposed' dividend. There was no objection raised in any of those Meetings as per Documentary evidence on record regarding the quantum of dividend. Even on 30/09/1999, which is one month prior to the filing of Company Petition, the Appellant had attended the Meeting and approved the dividend proposed. The Learned Senior Counsel for the Appellant submitted that the Appellant had abstained from voting on any Resolution in any Meeting of the 1st Respondent Company, subsequent to the filing of the Company Petition in the year 1999 and that when a few persons inherit all the shares equally in a Company, it is the legitimate expectation of every inheritor/Shareholder that the profits of the Company would get distributed equally among the Shareholders. Moreover, it is the case of the Appellant that it was only from the year 1997-98 that the remuneration and commission became exceedingly high amounting to crores of Rupees. It is also contended that the figures of remuneration and commission paid to the Shareholding Directors of the Subsidiaries were not placed for the approval of the Shareholders of R1 Company.
26. The Learned Senior Counsel for the Appellant strongly contended that in the year 2017-18 the Group Companies received an aggregate of Rs. 1321.51 Cores as total revenue, whereas R1 Company received only Rs. 34.51 Crores from all the subsidiaries, though the total remuneration / commission disbursed TA (AT) No. 18 & 114/2021 Page 40 of 104 by the various subsidiaries to all the Members of the family, except the Petitioner was Rs. 71.01 Cores, while Mrs. Mallika being a 10 % Shareholder received a total of Rs. 46.84 Crores as remuneration and Rs. 2.96 Crores as dividend, whereas the Petitioner though a 10 % Shareholder received only a dividend of Rs. 2.96 Crores. It is the case of the Appellant that Simpson and Company, TAFE and TMTL bring in more than 95 % of the aggregate of profit after tax of the entire group, is being effectively controlled only by the majority as they have appropriated to themselves the 20 % share of their mother in addition to the 40 % which they have usurped. The Appellant had filed C.A. 727/2001 to declare the transfer of Ms. Valli's 20 % shares in favour of the joint names of Mr. A. Sivasailam and Mr. A. Krishnamurthy as it was done in the Register of Members of R1 Company, as null and void. Mallika had filed CS 618/2013 to declare that half of Mrs. Valli's 20 % shares belonged to AS and after his demise to his legal heirs. It is admitted by Mrs. Mallika in her Petition that Mr. A. Sivasailam and Mr. A. Krishnamurthy were exercising voting rights and all other rights in respect of Mrs. Valli's shares and on such basis held managerial control over R1 Company, with the intention of vesting controlling interest of the Amalgamations group, in the hands of the two sons and the family members and thus quell the impending conflict in the management thereof. The transfer of Valli's 20 % shares was to avoid a possible deadlock and to vest in her two sons so that they could control R1 Company and through it, the other Companies of the group. The Learned Counsel for the Appellant submitted that Mrs. Mallika's TA (AT) No. 18 & 114/2021 Page 41 of 104 statement in Paras 34 and 35 in her Petition clinches the issue 'The Plaintiffs reliably understand from the records available that initially for the first few years, the Defendant No. 2 Company (R1 Company) paid the dividends to the owners, namely, Mr. A. Sivasilam and Defendant No. 1 (AK)..." ... "Accordingly, from the year 1993 onwards the Plaintiffs understand that the dividends which have been declared by Defendant No. 2 (R1) Company have been paid by drawing cheques in favour of the respective Trusts...". Hence, it is the case of the Appellant that these statements made by Mrs. Mallika establish that the control of the Subsidiaries vested with the Holding Company and that the associated Companies are inextricably connected, as to be in reality, part of one concern.
27. The Learned Senior Counsel for the Appellant also contended that the NCLT has opined that the principles of partnership cannot be made applicable to R1 Company since it was not a pre-existing partnership. It is argued that pre- existing partnership is not a necessary condition for applying partnership principles to a Company and in support of this submission the Learned Counsel placed reliance on the following Judgments: -
• 'Ebrahami Vs. Westbourne Galleries Limited and Ors.' (Supra) "It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves. To refer, as so many of the cases do, to "quasi-partnerships" or "in substance partnerships" may be convenient but may also be confusing. It may be convenient because it is the TA (AT) No. 18 & 114/2021 Page 42 of 104 law of partnership which has developed the conceptions of probity, good faith and mutual confidence, and the remedies where these are absent, which become relevant once such factors as I have mentioned are found to exist: the words "just and equitable" sum these up in the law of partnership itself. And in many, but not necessarily all, cases there has been a pre-existing partnership the obligations of which it is reasonable to suppose continue to underlie the new company structure. But the expressions may be confusing if they obscure or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations. A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in. • 'O'Neill & Anr. vs. Phillips & Ors.' reported in (1999) 1 WLR 1092 "This is putting the matter in very traditional language, reflecting in the word "conscience" the ecclesiastical origins of the long-departed Court of Chancery. As I have said, I have no difficulty with this formulation. But I think that one useful cross- check in a case like this is to ask whether the exercise of the power in question would be contrary to what the parties, by words or conduct, have actually agreed. Would it conflict with the promises which they appear to have exchanged? In Blisset v. Daniel the limits were found in the "general meaning" of the partnership articles themselves. In a quasi-partnership company, they will usually be found in the understandings between the members at the time they entered into association. But there may be later promises, by words or conduct, which it would be unfair to allow a member to ignore. Nor is it necessary that such promises should be independently enforceable as a matter of contract. A promise may be binding as a matter of justice and equity although for one TA (AT) No. 18 & 114/2021 Page 43 of 104 reason or another (for example, because in favour of a third party) it would not be enforceable in law."
• 'Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Anr.' reported in (1976) 3 SCC 259 "33. When more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides, it is only when shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding-up on the just and equitable ground. In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership. On the allegations and submissions in the present case, we are not prepared to extend these principles to the present company.
34. The principle of 'just and equitable' clause baffles a precise definition. It must rest with the judicial discretion of the court depending upon the facts and circumstances of each case. These are necessarily equitable considerations and may, in a given case be superimposed on law. Whether it would be so done in a particular case cannot be put in the straitjacket of an inflexible formula."
28. At this juncture, this Tribunal finds it relevant to refer to the Judgment of the Hon'ble Apex Court in the matter of 'Sangramsinh P. Gaekwad v. TA (AT) No. 18 & 114/2021 Page 44 of 104 Shantadevi P. Gaekwad', (2005) 11 SCC 314, which is reproduced as hereunder:-
"Quasi-partnership -- family company -- corporate veil
225. A company incorporated under the Companies Act is a body corporate. However, in certain situations, its corporate veil can be lifted. (See Kapila Hingorani v. State of Bihar [(2003) 6 SCC 1 : 2004 SCC (L&S) 586] .)
226. The Court, however, has made a clear distinction between a family company, a private company and a public limited company. The true character of the company, the business realities of the situation should not be confined to a narrow legalistic view. (See Needle Industries [(1981) 3 SCC 333].)
227. It is now well known that principles of quasi- partnership are not foreign to the concept of the Companies Act. For the purpose of grant of relief the principles of partnership have been applied even in a public limited company.
(See Loch v. John Blackwood Ltd. [1924 AC 783 :
1924 All ER Rep 200]
and Ebrahimi v. Westbourne Galleries
Ltd. [(1972) 2 All ER 492 : 1973 AC 360 : (1972) 2 WLR 1289 (HL)] )
228. The principles applicable to the winding up of a company contained in Section 44(g) of the Partnership Act were applied in a winding-up petition under Section 433(f) of the Companies Act by a three-Judge Bench of this Court in Hind Overseas (P) Ltd. v. Raghunath Prasad Jhunjhunwalla [(1976) 3 SCC 259 : AIR 1976 SC 565] following Ebrahimi [(1972) 2 All ER 492 :
1973 AC 360 : (1972) 2 WLR 1289 (HL)] . However, it was observed that when more than one family or several friends and relatives together TA (AT) No. 18 & 114/2021 Page 45 of 104 form a company and there is no right as such agreed upon for active participation of members who were sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked.
229. In Kilpest (P) Ltd. v. Shekhar Mehra [(1996) 10 SCC 696] it was stated: (SCC p. 701, paras 11-
12) "11. The promoters of a company, whether or not they were hitherto partners, elect to avail of the advantages of forming a limited company. They voluntarily and knowingly bind themselves by the provisions of the Companies Act. The submission that a limited company should be treated as a quasi-partnership should, therefore, not be easily accepted. Having regard to the wide powers under Section 402, very rarely would it be necessary to wind up any company in a petition filed under Sections 397 and 398.
12. The present was a petition under Sections 397 and 398. The Division Bench exercised power under Section 402 to appoint Mehra as a Director to protect his interests and guard against mismanagement. It required Dubey to return to the company the sum of Rs 52,875 which he had wrongly appropriated to himself.
It directed the Registrar of Companies to enquire into other allegations of misconduct in which it found, prima facie, substance; and we may say immediately that we have perused the report filed by the Registrar of Companies which shows that no substance was, ultimately, found therein. We agree with the Division Bench that this was no case for winding up the company and must dismiss the appeal filed by Mehra."
(See also Dabhol Power Co. [(2004) 3 Comp LJ 58 (Bom)] , para 43.)
230. Kilpest (P) Ltd. v. Shekhar Mehra [(1996) 10 SCC 696] whereupon Mr Desai placed strong TA (AT) No. 18 & 114/2021 Page 46 of 104 reliance, thus, cannot be said to be an authority for the proposition that for no purpose whatsoever can the principles of quasi-partnership be applied to an incorporated company. The real character of the company, as noticed hereinbefore, for the purpose of judging the dealings between the parties and the transactions which are impugned may assume significance and in such an event, the principles of quasi-partnership in a given case may be invoked.
231. The ratio of the said decision, with respect, cannot be held to be correct as a bare proposition of law, as was urged by Mr Desai, being contrary to larger Bench judgments of this Court and in particular Needle Industries [(1981) 3 SCC 333] . It is, however, one thing to say that for the purpose of dealing with an application under Section 397 of the Companies Act, the court would not easily accept the plea of quasi-partnership but as has been held in Needle Industries [(1981) 3 SCC 333] the true character of the company and other relevant factors shall be considered for the purpose of grant of relief having regard to the concept of quasi-partnership."
(Emphasis Supplied)
29. It is the common contention of all the Respondents that the appointments of Directors are in accordance with Law and the remuneration and commissions paid to the Directors are within the limits specified under Law, i.e., the limit of 11% of net profits. The remuneration fixed for the Directors is entirely justified considering the financial performance of these Companies. The balance sheets of the Subsidiaries are also placed for adoption in the AGMs of the Holding Companies. The Appellant is therefore estopped from questioning the TA (AT) No. 18 & 114/2021 Page 47 of 104 appointments and remuneration after having approved the consolidated Annual accounts of the entire group for years together.
30. It is submitted that the 1st Respondent Company or its Subsidiaries cannot be treated as a quasi-partnership. It is the common case of the Respondents that the observations made in 'Ebrahimi Vs. Westbourne' (Supra) are not applicable to this case and that the principles for applying equitable considerations i.e. the principles of quasi-partnership have been dealt exclusively in 'Hind Overseas Pvt. Ltd. Vs. Raghunath Prasad Jhunjhunwala' reported in [1976 3 SCC 259] and in the matter of 'Tata Consultancy Services Ltd. Vs. Cyrus Investments Pvt. Ltd.' [(2021) 9 SCC 449].
31. At this juncture, we find it appropriate to address the issue as to whether any excessive remuneration and commission paid to the Directors of the Subsidiaries and consequent reduction of dividends, if any, would constitute an act of Oppression and Mismanagement. It is the case of the Appellant that the remuneration paid is 'exorbitant', and that the 'major chunk' of the profits earned by the Subsidiaries was fritted away towards such remuneration. The Learned Counsel for the Respondents have drawn our attention to the financial performance of these Companies and to the fact that the Appellant had proposed / seconded the Resolutions in favour of adopting the accounts of the entire R1 Group at every AGM until filing of the Company Petition. It is seen from the record that the first Company Petition was filed in the year 1998 and there is no TA (AT) No. 18 & 114/2021 Page 48 of 104 dispute that the Appellant had approved the Resolutions till the year 1999. Section 212 of the Companies Act. 1956 which is equivalent to Section 129 (2) (3) of the Companies Act, 2013 stipulates that where a Company has one or more subsidiaries or associate Companies, it shall, in addition to financial statements provided under Sub Section (2) prepare a Consolidated Financial Statement of the Company and of all the Subsidiaries and associate Companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be presented before the Annual General Meeting of the Company along with the laying of its Financial Statements under Sub Section (2). As Section 129 (2) provides that at every Annual General Meeting of the Company, the Board of Directors of the Company, shall present before such Meeting Financial Statements for the Financial Year, the Accounts placed for approval by the Shareholders of the R1 Company include the balance sheets of the Subsidiaries which are also placed for adoption in the AGM of the Holding Company. Having been a part of these AGMs till 1999 and having approved the Consolidated Annual Accounts, we are of the considered view that the Appellant cannot, now at this stage, question the remuneration being paid and the dividends having been declared. The Appellants had also contended that though the remuneration and commission is within the limit of 11% profits, it is oppressive to him and argued that as per the ratio of 'Needle Industries Limited' (Supra), though the Act may be legal, it could still be oppressive. We find force in the contention of the common argument of the Respondents that mere unfairness does TA (AT) No. 18 & 114/2021 Page 49 of 104 not constitute oppression and that whether conduct is oppressive or not is a question of fact to be determined in each case. The facts of the attendant case do not show that there is any 'lack of probity' or 'fair dealing' relating to the exercise of proprietary rights as a Shareholder to constitute oppression. Admittedly, the remuneration paid to the Directors of the Subsidiaries is within the limits prescribed under the Companies Act, 1956 and also the Companies Act, 2013. It is also significant to mention that none of the Shareholders of the respective Subsidiaries have complained with regard to the remuneration paid to the Directors of the respective Companies, neither have they challenged their appointment. It is the case of the Appellant there is a 'legitimate expectation' of being appointed as Director with remuneration so as to enjoy the profits of the Subsidiaries in addition to the dividends by virtue of inheritance of shares from his late mother who in turn inherited the shares from her father. It is the Appellant's case that pre-existing partnership is not a necessary condition for applying partnership principles to a Company, though it might be a sufficient condition. We are of the view that the principles of quasi-partnership and legitimate expectation, if at all applicable, can be invoked only when there is an agreement or an understanding for a Joint management or a specific promise for Board representation at the time of incorporation or inducement for investment in the Company, which in the present facts, admittedly do not arise. It is not the case of the Appellant that the Appellant's mother had claimed any such legitimate expectation during her lifetime. Be that as it may, a family held Company cannot TA (AT) No. 18 & 114/2021 Page 50 of 104 be ipso facto be treated as a quasi-partnership. There was no pre-existing partnership prior to incorporation of the 1st Respondent Company nor was there any existence of promise to offer Directorship to any Appellant who had become a Shareholder only by inheritance and not by inducement. It is seen from the record that the 1st Respondent Company was incorporated as a Private Company on 22/12/1938 long before the Appellant had become a Shareholder. There is no claim of partnership by the Appellant or his mother or any other Shareholder subsequent to his becoming a Shareholder in 1974. Mr. A. Sivasailam and Mr. A. Krishnamurthy were the Directors of the Company until 2011 till the demise of Mr. A. Sivasailam. It is seen from the record that the Statement showing the proposals of various AGMs of R1 Company (as seen in the Table extracted in Para 21) the appointment of Mr. A. Sivasailam and Mr. A. Krishnamurthy as Directors of the Company was approved by the Appellant.
32. The list of Directors occupying the Board of Amalgamations Pvt. Ltd. Since inception is given as hereunder:-
TA (AT) No. 18 & 114/2021 Page 51 of 104 TA (AT) No. 18 & 114/2021 Page 52 of 104
33. Table showing the 'Nature of Company'.
TA (AT) No. 18 & 114/2021 Page 53 of 104
34. The Hon'ble Apex Court in 'Kilpest Private Limited Vs. Shekar Mehra' (1996) 10 SCC 696 held that 'the real character of the Company as noticed herein before, for the purpose of judging the dealings between the Parties and the Transactions which are impugned may assume significance and in such an event, the principles of quasi-partnership in a given case may be invoked'. It is held that 'it is however one thing to say that for the purpose of dealing with an Application under Section 397 of the Companies Act, 1956, the Court would not easily accept the plea of quasi-partnership but as has been held in 'Needle Industries' (Supra), the true character of the Company and other relevant factors shall be considered for the purpose of grant of relief having regard to the concept of quasi-partnership. 'Sangramshinh' has reiterated the principle in 'Shanti Prasad Jain' referring to 'Elder Vs. Elder and Watson Ltd.' 1952 SCC 49 in which it was categorically held that the conduct complained of must relate to the manner of management of the affairs of the Company and must be such so as to oppress the minority of the Members including the Petitioners qua-shareholders. The Court also opined that Law, however, has not defined what oppression is for the purpose of the said Section and it was left to the Court to decide depending upon the facts of each case, whether there was any oppression. From the aforenoted Table (Para 33), it is crystal clear that different subsidiaries under the Holding Company, i.e. Amalgamations Pvt. Ltd. have different dates of incorporation and comprise of several listed Companies having foreign Shareholders. It is not in dispute that Agco Holding BV, U.S.A has 23.75% of TA (AT) No. 18 & 114/2021 Page 54 of 104 the Shareholding with a foreign Director in TAFE; T. Stanes and Company Ltd. is a listed Company with 32 % Public Shareholding; L.M.Van Moppes Diamond Tools India Pvt. Ltd. has a foreign Director with Saint Gobain Abrasives owning 49 % of the shares. There are several other Subsidiaries being listed Companies with outside Shareholding. Therefore, keeping in view the aforenoted facts and the complex nature of the Company, viewed from any angle, the contention of the Appellant that this Family Company be viewed as a 'quasi-partnership' concern cannot be sustained.
LIFTING OF 'THE CORPORATE VEIL'
35. It is vehemently argued by the Learned Counsel for the Appellant that the observation made by the NCLT that the Appellant had given up the issue relating to Corporate Veil, is totally perverse. It is submitted that the Respondents themselves have admitted that the Group is a closely held family Company. It is the Appellant's case that when the associated Companies are inextricably connected as to be, in reality, part of one Concern, Corporate Veil need not be lifted.
36. As regarding the issue of lifting of Corporate Veil it is clear from the Order of the Hon'ble Supreme Court dated 27/03/2017, detailed in Para 6 has permitted the Appellant to proceed against the Subsidiaries if the Corporate Veil can be lifted against those entities and observed as follows: - TA (AT) No. 18 & 114/2021 Page 55 of 104
"....Further, the subsidiary companies against whom the appellant has not made any allegations in the Petition and no relief has been sought for against need not be added as parties. However, Respondent Nos. 8, 9, 13, 14, 16, 17 and 18 and Respondent Nos. 4 and 7 should be added as parties and the appellant shall be at liberty to argue on the grounds in the said Petition and the prayer regarding the alleged mis-management of the companies in question in case the corporate veil is lifted. The Section 397/398 Petition is maintainable as the appellant holds 10% of the share capital in the holding company. The High Court is not correct in saying that the subsidiary companies above mentioned should be struck from the array of parties as, if the corporate veil is lifted, the holding and subsidiaries companies will be -2- regarded as one and the same for the purpose of granting relief in the said Petition. The High Court Judgment is upheld insofar as it treats the Company Petition as being under Section 397/398 and not Section 235 of the Companies Act, 1956...."
(Emphasis Supplied)
37. The decisions relied upon by the Appellant to support his case that 'Corporate Veil' need not be lifted in all cases are as follows:-
• State of UP and Ors. Vs. Renusagar Power Company and Ors.
[1978 4 SCC 59] "66. It is high time to reiterate that in the expanding horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation. The aim of the legislation is to do justice to all the parties. The horizon of the doctrine of lifting of corporate veil is expanding. Here, indubitably, we are of the opinion that it is correct that Renusagar was TA (AT) No. 18 & 114/2021 Page 56 of 104 brought into existence by Hindalco in order to fulfil the condition of industrial licence of Hindalco through production of aluminium. It is also manifest from the facts that the model of the setting up of power station through the agency of Renusagar was adopted by Hindalco to avoid complications in case of take over of the power station by the State or the Electricity Board. As the facts make it abundantly clear that all the steps for establishing and expanding the power station were taken by Hindalco, Renusagar is wholly owned subsidiary of Hindalco and is completely controlled by Hindalco. Even the day-to-day affairs of Renusagar are controlled by Hindalco.
Renusagar has at no point of time indicated any independent volition. Whenever felt necessary, the State or the Board have themselves lifted the corporate veil and have treated Renusagar and Hindalco as one concern and the generation in Renusagar as the own source of generation of Hindalco. In the impugned order the profits of Renusagar have been treated as the profits of Hindalco."
(Emphasis Supplied) • Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 : (2012) 3 SCC (Civ) 867 : 2012 SCC OnLine SC 77 at page 712 "258. Holding company, of course, if the subsidiary is a WOS, may appoint or remove any Director if it so desires by a resolution in the general body meeting of the subsidiary. Holding companies and subsidiaries can be considered as single economic entity and consolidated balance sheet is the accounting relationship between the holding company and subsidiary company, which shows the status of the entire business enterprises. Shares of stock in the subsidiary company are held as assets on the books of the parent company and can be issued as collateral for additional debt financing. Holding company and subsidiary company are, however, considered as separate TA (AT) No. 18 & 114/2021 Page 57 of 104 legal entities, and subsidiary is allowed decentralised management. Each subsidiary can reform its own management personnel and holding company may also provide expert, efficient and competent services for the benefit of the subsidiaries."
• Bajrang Prasad Jalan v. Mahabir Prasad Jalan, 1998 SCC OnLine Cal 326 : AIR 1999 Cal 156 : (2001) 40 CLA 149 at page 162 "22. Furthermore, the fact as noticed hereinbefore, clearly shows that behind all the aforementioned companies individuals have their hand which allegedly were manoeuvring the affairs of the company in such a manner so as to oust others from the affairs of the company. The rights, expectations and obligations of the members of family, their nominees and relations has to be considered in the backdrop of events and it cannot be said that even if fact exists, the veil of the company cannot be lifted. Exercise of right under Sections 397 and 398 of the Companies Act comes within the purview of the equitable jurisdiction of the company Court. There can hardly be any dispute that in view of the structures of share the respondent Nos. 2 to 5 in truth and substance and subsidiary companies of Akshay Nidhi Ltd. which is thus, a holding Company and thus in such a situation, the Court cannot be a helpless spectator in looking behind the corporate veil so as to disentitle itself from considering as to whether in fact there had been mismanagement of oppression by one group or the other. There is another aspect of the matter. Provisions of Section 397 and 398 are taken recourse to in a piquant situation where two groups running the company are at logger heads so that it is impossible for them to join hands together and run the affairs of the company. The Court in such a situation would exercise its equitable jurisdiction and may grant appropriate reliefs.
TA (AT) No. 18 & 114/2021 Page 58 of 104 23-24. In Life Insurance Corporation of India v. Escorts Ltd., reported in AIR 1986 SC 1370 : (1986 Tax LR 1370) the Apex Court after taking into consideration various decisions and treatises held that for certain purposes corporate veil can be lifted. It was stated (at page 1418 (of AIR):--
"Generally and broadly speaking, we may say that the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since, they must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected etc."
25. Reference in this connection may also be made to 1972 (2) All ER 492 at page 496 to 500, Hind Overseas Private Ltd. v. Raghunath Prasad Jhunjhunwalla reported in AIR 1976 SC 565 (Paragraph 20, 31, 32 and 33) and Needle Industries (India) Ltd. v. Needle Industries Newey (I) Holdings Ltd., reported in AIR 1981 SC 1298 (Paragraphs 44 and 50).
26. In Loch v. John Blackwood Ltd. reported in 1924 AC 783, it has been held that certain companies may be treated as family or domestic concerns. In the instant case as noticed hereinbefore Akshay Nidhi Ltd. was managed by Jalans. When a partition took place amongst the three brothers, Akshay Nidhi Ltd. was not allotted in favour of Tolaram Jalan and remained in the joint venture of M.P.J. and his sons and B.P.J. and TA (AT) No. 18 & 114/2021 Page 59 of 104 his sons. Therefore, the concept of partnership is also available in relation to such a company.
27. It is also a trite law that over the affairs of company in question its entire affairs including those of the subsidiary companies can also be looked into."
(Emphasis Supplied)
38. It is the common case of the Respondents that the Appellant has stated in his written submissions before the NCLT that there were no requirement to lift the Corporate Veil. The Learned Senior Counsel for the Respondent relied on the Judgment in the matter of 'Vodafone International Holdings BV Vs. Union of India' reported in [(2012) 6 SCC 613] in which the Hon'ble Apex Court has held in Para 99, 100 & 101 that even if a Corporate Group functions as a single economic unit for accounting or tax purposes, a Holding Company and Subsidiary Companies are considered as separate legal entities.
"96. At the outset, we need to reiterate that in this case we are concerned with the sale of shares and not with the sale of assets, itemwise. The facts of this case show sale of the entire investment made by HTIL, through a top company viz. CGP, in the Hutchison structure. In this case we need to apply the "look at" test. In the impugned judgment, the High Court has rightly observed that the arguments advanced on behalf of the Department vacillated. The reason for such vacillation was adoption of "dissecting approach" by the Department in the course of its arguments. Ramsay [1982 AC 300 : (1981) 2 WLR 449 : (1981) 1 All ER 865 (HL)] enunciated the look at test. According to that test, the task of the Revenue is to ascertain the legal nature of the TA (AT) No. 18 & 114/2021 Page 60 of 104 transaction and, while doing so, it has to look at the entire transaction holistically and not to adopt a dissecting approach.
97. One more aspect needs to be reiterated. There is a conceptual difference between a preordained transaction which is created for tax avoidance purposes, on the one hand, and a transaction which evidences investment to participate in India. In order to find out whether a given transaction evidences a preordained transaction in the sense indicated above or investment to participate, one has to take into account the factors enumerated hereinabove, namely, duration of time during which the holding structure existed, the period of business operations in India, generation of taxable revenue in India during the period of business operations in India, the timing of the exit, the continuity of business on such exit, etc.
98. Applying these tests to the facts of the present case, we find that the Hutchison structure has been in place since 1994. It operated during the period 1994 to 11-2-2007. It has paid income tax ranging from Rs 3 crores to Rs 250 crores per annum during the period 2002-2003 to 2006-2007. Even after 11-2-2007, taxes are being paid by VIH ranging from Rs 394 crores to Rs 962 crores per annum during the period 2007-2008 to 2010-2011 (these figures are apart from indirect taxes which also run in crores). Moreover, the SPA indicates "continuity" of the telecom business on the exit of its predecessor, namely, HTIL. Thus, it cannot be said that the structure was created or used as a sham or tax avoidant. It cannot be said that HTIL or VIH was a "fly by night" operator/short-time investor.
99. If one applies the look at test discussed hereinabove, without invoking the dissecting approach, then, in our view, extinguishment took place because of the transfer of the CGP share and not by virtue of various clauses of SPA. In a case like the present one, where the structure has existed TA (AT) No. 18 & 114/2021 Page 61 of 104 for a considerable length of time generating taxable revenues right from 1994 and where the court is satisfied that the transaction satisfies all the parameters of "participation in investment"
then in such a case the court need not go into the questions such as de facto control versus legal control, legal rights versus practical rights, etc.
100. Be that as it may, did HTIL possess a legal right to appoint Directors onto the board of HEL and as such had some "property right" in HEL? If not, the question of such a right getting "extinguished" will not arise. A legal right is an enforceable right. Enforceable by a legal process. The question is what is the nature of the "control" that a parent company has over its subsidiary. It is not suggested that a parent company never has control over the subsidiary. For example, in a proper case of "lifting of corporate veil", it would be proper to say that the parent company and the subsidiary form one entity. But barring such cases, the legal position of any company incorporated abroad is that its powers, functions and responsibilities are governed by the law of its incorporation. No multinational company can operate in a foreign jurisdiction save by operating independently as a "good local citizen".
101. A company is a separate legal persona and the fact that all its shares are owned by one person or by the parent company has nothing to do with its separate legal existence. If the owned company is wound up, the liquidator, and not its parent company, would get hold of the assets of the subsidiary. In none of the authorities have the assets of the subsidiary been held to be those of the parent unless it is acting as an agent. Thus, even though a subsidiary may normally comply with the request of a parent company it is not just a puppet of the parent company. The difference is between having power or having a persuasive position.
Though it may be advantageous for parent and subsidiary companies to work as a group, each subsidiary will look to see whether there are TA (AT) No. 18 & 114/2021 Page 62 of 104 separate commercial interests which should be guarded."
(Emphasis Supplied)
39. This Tribunal finds it apt to refer to the ratio of the Judgment of the Hon'ble Apex Court in the matter of 'State of U.P. and Ors. Vs. Renusagar Power Company and Ors.' reported in [(1988) 4 SCC 59] in which it is observed as follows:
67. In the aforesaid view of the matter we are of the opinion that the corporate veil should be lifted and Hindalco and Renusagar be treated as one concern and Renusagar's power plant must be treated as the own source of generation of Hindalco and should be liable to duty on that basis. In the premises the consumption of such energy by Hindalco will fall under Section 3(1)(c) of the Act.
The learned Additional Advocate-General for the State relied on several decisions, some of which have been noted.
68. The veil on corporate personality even though not lifted sometimes, is becoming more and more transparent in modern company jurisprudence. The ghost of Salomon case [1897 AC 22] still visits frequently the hounds of Company Law but the veil has been pierced in many cases. Some of these have been noted by Justice P.B. Mukharji in the New Jurisprudence [ Tagore Law Lectures, p. 183].
69. It appears to us, however, that as mentioned the concept of lifting the corporate veil is a changing concept and is of expanding horizons. We think that the appellant was in error in not treating Renusagar's power plant as the power plant of Hindalco and not treating it as the own source of energy. The respondent is liable to duty on the same and on that footing alone; this is evident in view of the principles enunciated and the doctrine now established by way of decision of this Court in TA (AT) No. 18 & 114/2021 Page 63 of 104 Life Insurance Corpn. of India [(1986) 1 SCC 264 : AIR 1986 SC 1370 : 1985 Supp (3) SCR 909 :
(1986) 59 Com Cas 548] that in the facts of this case Sections 3(1)(c) and 4(1)(c) of the Act are to be interpreted accordingly. The persons generating and consuming energy were the same and the corporate veil should be lifted. In the facts of this case Hindalco and Renusagar were inextricably linked up together. Renusagar had in reality no separate and independent existence apart from and independent of Hindalco.
70. In the aforesaid view of the matter we are of the opinion that consumption of energy by Hindalco is clearly consumption by Hindalco from its own source of generation. Therefore, the rates of duty applicable to own source of generation have to be applied to such consumption, that is to say, 1 paisa per unit for the first two generating sets and nil rate in respect of third and fourth generating sets. It is appropriate to refer that having regard to the conduct of the State the power cuts matter and also the present proceedings the State should not be permitted to treat consumption of Renusagar's energy by Hindalco as anything other than (sic or) different from consumption of energy by Hindalco from its own source of generation. We are, therefore, of the opinion that in the facts of this case the corporate veil must be lifted and Hindalco and Renusagar should be treated as one concern and if that is taken the consumption of energy by Hindalco must be regarded as consumption by Hindalco from its own source of generation."
40. In the aforenoted matter it was held that both 'Hindalco' and 'Renusagar' be treated as one concern and that the Corporate Veil should be lifted. In this matter, it was observed that the consumption of energy by 'Hindalco' is clearly the consumption from its own source of generation and therefore, based on the facts of the matter the Corporate Veil was sought to be lifted. In the aforenoted TA (AT) No. 18 & 114/2021 Page 64 of 104 case, the persons generating and consuming the energy were the same and hence, Corporate Veil was directed to be lifted. It was observed by the Hon'ble Apex Court that 'Hindalco' and 'Renusagar' were inextricably linked up together and 'Renusagar' had in reality no separate and independent existence, apart from and independent of 'Hindalco'. In this case, it is crystal clear that the Subsidiary Companies and the Holding Company do not have any 'inextricably linked up businesses' and therefore, the contention of the Appellant that based on the ratio of this Judgment, the Respondent Companies should all be treated as a 'Single Economic Unit', fails. Hence, what is required to be examined to necessitate the lifting of the Corporate Veil 'is the character and nature of the Company', the Shareholding pattern, interconnected businesses, common assets and liabilities etc.. In the facts of this matter, it is clear that the nature of the Holding and the Subsidiary Companies is such that each Subsidiary is required to be treated as a separate legal entity and therefore, to view the Subsidiaries together with the Holding Company as a single economic unit cannot be an acceptable proposition within the framework of Law, specifically keeping in view that the character of each Subsidiary Company being different, is an admitted fact.
41. It is apposite, at this point to refer to the observations made by the Hon'ble Apex Court in the matter of 'Balwant Rai Saluja vs. Air India Limited' reported in [(2014) 9 SCC 407] in which the Hon'ble Apex Court has observed as follows:- TA (AT) No. 18 & 114/2021 Page 65 of 104
"70. The doctrine of "piercing the corporate veil" stands as an exception to the principle that a company is a legal entity separate and distinct from its shareholders with its own legal rights and obligations. It seeks to disregard the separate personality of the company and attribute the acts of the company to those who are allegedly in direct control of its operation. The starting point of this doctrine was discussed in the celebrated case of Salomon v. Salomon & Co. Ltd. [1897 AC 22 : (1895-99) All ER Rep 33 (HL)] Lord Halsbury LC, negating the applicability of this doctrine to the facts of the case, stated that : (AC pp. 30 & 31) "[a company] must be treated like any other independent person with its rights and liabilities [legally] appropriate to itself ... whatever may have been the ideas or schemes of those who brought it into existence."
Most of the cases subsequent to Salomon case [1897 AC 22 : (1895-99) All ER Rep 33 (HL)] , attributed the doctrine of piercing the veil to the fact that the company was a "sham" or a "façade". However, there was yet to be any clarity on applicability of the said doctrine.
71. In recent times, the law has been crystallised around the six principles formulated by Munby, J. in Ben Hashem v. Ali Shayif [Ben Hashem v. Ali Shayif, 2008 EWHC 2380 (Fam)] . The six principles, as found at paras 159-64 of the case are as follows:
(i) Ownership and control of a company were not enough to justify piercing the corporate veil;
(ii) The court cannot pierce the corporate veil, even in the absence of third-party interests in the company, merely because it is thought to be necessary in the interests of justice;TA (AT) No. 18 & 114/2021 Page 66 of 104
(iii) The corporate veil can be pierced only if there is some impropriety;
(iv) The impropriety in question must be linked to the use of the company structure to avoid or conceal liability;
(v) To justify piercing the corporate veil, there must be both control of the company by the wrongdoer(s) and impropriety, that is use or misuse of the company by them as a device or facade to conceal their wrongdoing; and
(vi) The company may be a "façade" even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions. The court would, however, pierce the corporate veil only so far as it was necessary in order to provide a remedy for the particular wrong which those controlling the company had done.
72. The principles laid down by Ben Hashem case [Ben Hashem v. Ali Shayif, 2008 EWHC 2380 (Fam)] have been reiterated by the UK Supreme Court by Lord Neuberger in Prest v. Petrodel Resources Ltd. [(2013) 2 AC 415 : (2013) 3 WLR 1 : 2013 UKSC 34] , UKSC at para 64. Lord Sumption, in Prest case [(2013) 2 AC 415 : (2013) 3 WLR 1 : 2013 UKSC 34] , finally observed as follows : (AC p. 488, para 35) "35. I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.
The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the TA (AT) No. 18 & 114/2021 Page 67 of 104 advantage that they would otherwise have obtained by the company's separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil."
73. The position of law regarding this principle in India has been enumerated in various decisions. A Constitution Bench of this Court in LIC v. Escorts Ltd. [(1986) 1 SCC 264] , while discussing the doctrine of corporate veil, held that : (SCC pp. 335-36, para 90) "90. ... Generally and broadly speaking, we may say that the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected, etc."
74. Thus, on relying upon the aforesaid decisions, the doctrine of piercing the veil allows the court to disregard the separate legal personality of a company and impose liability upon the persons exercising real control over the said company. However, this principle has been and should be applied in a restrictive manner, that is, only in scenarios wherein it is evident that the company TA (AT) No. 18 & 114/2021 Page 68 of 104 was a mere camouflage or sham deliberately created by the persons exercising control over the said company for the purpose of avoiding liability. The intent of piercing the veil must be such that would seek to remedy a wrong done by the persons controlling the company. The application would thus depend upon the peculiar facts and circumstances of each case."
42. It is a settled law that Holding Company and its Subsidiaries are incorporated Companies each having a separate Legal identity, and each, a separate Corporate Veil. The Corporate Veil between the Holding Company and the Subsidiary Companies remains in the absence of which they would all be construed as one Company and one Corporate Personality, which within the framework of law, they cannot be so. It is the case of the Respondent that the Appellant had given up the issue of lifting of the Corporate Veil and therefore, the NCLT had not dealt with the specific issue. It is seen from the aforenoted Judgment of the Hon'ble Apex Court in Civil Appeal Nos. 4574-4575/2017 dated 27/03/2017 that there is a specific direction that the Subsidiary Companies could be included or arrayed as Parties, if the Corporate Veil is lifted. In the instant case, the contention of the Learned Senior Counsel for the Appellant that the Holding Company and the Subsidiaries constitute a single economic unity and therefore, the question of lifting the Corporate Veil does not arise, is untenable, keeping in view the nature of the Company (Table in Para 33) and the observations of the Hon'ble Apex Court in the aforenoted Judgments. TA (AT) No. 18 & 114/2021 Page 69 of 104
INVOKING THE JUST AND EQUITABLE STANDARD
43. It is not in dispute that the Appellant is a Shareholder not by investment or inducement but by inheritance. At this point, we find it pertinent to place reliance on the observations made by the Hon'ble Apex Court in the matter of 'Tata Consultancy Services Ltd. Vs. Cyrus Investments Pvt. Ltd.& Ors.' reported in [2021 SCC OnLine SC 272] which reads as follows:
"138. But it must be remembered that the origin of just and equitable clause is to be traced to the Law of Partnership which has developed, according to the House of Lords, "the conceptions of probity, good faith and mutual confidence". Having said that, Ebrahimi [Ebrahimi v. Westbourne Galleries Ltd., 1973 AC 360 : (1972) 2 WLR 1289 (HL)] pointed out that the reference to quasi- partnerships or "in-substance partnerships" is also confusing for the reason that though the parties may have been partners in their 'Purvashrama', they had become co-members of a company accepting new obligations in law. Therefore, "a company, however small, however domestic, is a company and not a partnership or even a quasi-partnership".
139. That, "for superimposing an equitable fetter on the exercise of the rights conferred by the articles of association, there must be something in the history of the company or the relationship between the shareholders", is fairly well settled [Saul D. Harrison & Sons Plc., In re, 1994 BCC 475] .
140. In Lau v. Chu [Lau v. Chu, (2020) 1 WLR 4656 (PC)] , the House of Lords indicated: (WLR p. 4662, para 14) "that a just and equitable winding up may be ordered where the company's TA (AT) No. 18 & 114/2021 Page 70 of 104 members have fallen out in two related but distinct situations, which may or may not overlap." The first of these is labelled as, "functional deadlock", where the inability of members to cooperate in the management of the company's affairs leads to an inability of the company to function at Board or shareholder level. The House of Lords pointed out that functional deadlock of a paralysing kind was first clearly recognised as a ground for just and equitable winding up in Sailing Ship Kentmere Co., In re [Sailing Ship Kentmere Co., In re, 1897 WN 58] . The second of these is where a company is a corporate quasi-partnership and an irretrievable breakdown in trust and confidence between the participating members has taken place. In the first type of these cases, where there is a complete functional deadlock, winding up may be ordered regardless whether the company is a quasi-partnership or not. But in the second type of cases, a breakdown of trust and confidence is enough even if there is not a complete functional deadlock.
141. Therefore, for invoking the just and equitable standard, the underlying principle is that the court should be satisfied either that the partners cannot carry on together or that one of them cannot certainly carry on with the other [ The advantage that the English courts have is that irretrievable breakdown of relationship is recognised as a ground for separation both in a matrimonial relationship and in commercial relationship, while it is not so in India.] .
142. In the case in hand there was never and there could never have been a relationship in the nature of quasi-partnership between the Tata Group and SP Group. SP Group boarded the train half-way through the journey of Tata Sons. Functional deadlock is not even pleaded nor proved.
143. Coming to the Indian cases, this Court held in Rajahmundry Electric Supply Corpn. Ltd. v. A. TA (AT) No. 18 & 114/2021 Page 71 of 104 Nageshwara Rao [Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageshwara Rao, (1955) 2 SCR 1066 : AIR 1956 SC 213] that for the invocation of just and equitable clause, there must be a justifiable lack of confidence on the conduct of the Directors, as held. A mere lack of confidence between the majority shareholders and minority shareholders would not be sufficient, as pointed out in Shanti Prasad Jain v. Kalinga Tubes Ltd. [Shanti Prasad Jain v. Kalinga Tubes Ltd., AIR 1965 SC 1535] Newey (India) Holding Ltd., (1981) 3 SCC 333] , it was contended that even the profitability of the company has no bearing if just and equitable standard is fulfilled and that the test is not whether an act is lawful or not but whether it is oppressive or not.
144. It was contended repeatedly that lack of probity in the conduct of the Directors is a sufficient cause to invoke just and equitable clause. Drawing our attention to the landmark decision in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [Needle Industries (India) Ltd. v. Needle Industries], it was contended that even the profitability of the Company has no bearing if just and equitable standard is fulfilled and that the test is not whether an act is lawful or not but whether it is oppressive or not."
(Emphasis Supplied)
44. It is held by the Hon'ble Supreme Court that for invoking the 'just and equitable standard', the underlying principle is that the Court should be satisfied that the partners cannot carry on together or that one of them cannot certainly carry on without the other and there is a 'functional deadlock'. It was observed that 'SP Group had boarded the train half way through the journey of Tata Sons' in the instant case, there is a lack of confidence and trust between the Appellants TA (AT) No. 18 & 114/2021 Page 72 of 104 and the Respondents and this lack of confidence alone would not be sufficient, as pointed out in 'SP Jain Vs. Kalinga Tubes' (Supra). There should also be lack of probity in the conduct of Directors to invoke this just and equitable clause. In the instant case, having regard to the history of inheritance of shares of the Appellants; the nature of the Company i.e. that the Subsidiaries of the Holding Company include Limited Companies, Foreign Directors and Foreign Shareholders with different dates of incorporation; that the Appellant had become a Shareholder in 1974 after the Company was incorporated in 1938 and had boarded the train halfway through; that there was no claim of quasi-partnership for a period of 25 years thereafter; that the Articles of Association of the R1 Company do not support the Appellant's contention; there is no functional deadlock, or impediment in the functioning of the Companies; this Tribunal is not sufficiently satisfied to invoke the just and equitable clause. As held by the Hon'ble Apex Court that Oppression involves an element of lack of probity or fair dealing to a member in matters of his proprietary right as a Shareholder and not any harsh or unfair treatment in any other capacity. In the instant case, the proprietary rights of the Appellant as a Shareholder are in no way affected. The lack of confidence must be grounded on the manner and mode in which the Company is being run and on the conduct of the Directors but not in respect to their private lives. The Hon'ble Apex Court in 'Jhunjhunwalla' case and in 'Ebrahimi' case has categorically observed that the principle of special relationship between the Parties forming the substratum of the Company could TA (AT) No. 18 & 114/2021 Page 73 of 104 be invoked only in a case where originally the business was a partnership concern which was later on converted into a Private limited Company or where the Corporate Veil was lifted, and it could be found that in reality it was a partnership.
45. To reiterate, in the matter of 'Ebrahimi vs. Westbourne Galleries Ltd and Others, (1972) 2 All ER 492 (House of Lords), three elements were stated for consideration of the concept of quasi-partnership i.e., (i) formation of association or continued on the basis of personal relationship (ii) an agreement or understanding for participation in the conduct of business, and (iii) restriction on the transfer of shares. In the matter of 'MSDC Radharamanan Vs. M S D Chandrasekhara Raja & Ors.' reported in AIR 2008 SC 1738, it was held that the true character of the Company and other relevant factors should be considered to decide the true factor of 'quasi-partnership'. In the matter of 'Vijayam Rajes and Anr. Vs. MSP Plantations Private Limited (1999) 95 CC 482 (CLB), it was held that family company cannot be assumed to be a quasi-partnership. In matter of 'V.M. Rao and Ors. Vs. Rajeswari Ramakrishnan & Ors.' reported in (1987) 61 Comp Case 20 (Mad) (Para 60-61 and 107), it was specifically held that the principles of quasi-partnership can be invoked only in a case where originally the business was a partnership concern which was later on converted into a private limited company or where if the Corporate Veil or Corporate character of a Company is lifted, it could be found that in reality it was a partnership. The Appellant has not entered into any partnership argument or understanding with TA (AT) No. 18 & 114/2021 Page 74 of 104 the other shareholders of the first Respondent Company or any other Company in the Group. The 'Amalgamation' group of Companies cannot be considered as a 'Partnership' in the light of the complex Shareholding pattern, independent management of each Company, Management participation from domestic / foreign investors and specifically in the absence of any kind of understanding between the Shareholders. This Tribunal is of the considered view that the equitable considerations can only flow from the fact if the Company had originally been started as a Partnership concern or if there was an Agreement or understanding that all or some of the Shareholders should participate in the conduct of the business. In the facts of the attendant case, there is neither any agreement nor understanding of any such nature and therefore, we are of the earnest view that the question of the Respondent Company being viewed as a Partnership Concern, does not arise.
APPELLANT'S RIGHTS AS A SHAREHOLDER OF R1 COMPANY
46. Regarding the 'Rights of a Shareholder', it is apt to refer to the observations made by 'Lord Anderson in 'Commissioners of Inland Revenue v. Forrest' [8 Taxcases P 704] specified in 'Bacha F. Guzdar v. CIT', reported in AIR 1955 SC 74, which read as hereunder: -
7. It was argued by Mr Kolah on the strength of an observation made by Lord Anderson in Commissioners of Inland Revenue v. Forrest [8 Tax Cases, p 704 at 710] TA (AT) No. 18 & 114/2021 Page 75 of 104 that an investor buys in the first place a share of the assets of the industrial concern proportionate to the number of shares he has purchased and also buys the right to participate in any profits which the company may make in the future. That a shareholder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company. The use of the word 'assets' in the passage quoted above cannot be exploited to warrant the inference that a shareholder, on investing money in the purchase of shares, becomes entitled to the assets of the company and has any share in the property of the company. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them.
The interest of a shareholder vis-a-vis the company was explained in the Sholapur Mills Case [1950 SCC 833 : (1950) SCR 869, 904] .
That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company. It is true that the shareholders of the company have the, sole determining voice in administering the affairs of the company and are entitled, as provided by the Articles of Association to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company. The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders. The dividend is a share of the profits declared by the company as liable to be distributed among the shareholders. Reliance is placed on behalf of the appellant on a passage in Buckley's Companies Act (12th Edn.), p. 894 where the etymological meaning of dividend is given as dividendum, the TA (AT) No. 18 & 114/2021 Page 76 of 104 total divisible sum but in its ordinary sense it means the sum paid and received as the quotient forming the share of the divisible sum payable to the recipient. This statement does not justify the contention that shareholders are owners of a divisible sum or that they are owners of the property of the company. The proper approach to the solution of the Question 1s to concentrate on the plain words of the definition of agricultural income which connects in no uncertain language revenue with the land from which it directly springs and a stray observation in a case which has no bearing upon the present question does not advance the solution of the question. There is nothing in the Indian law to warrant the assumption that a shareholder who buys shares buys any interest in the property of the company which is a juristic person entirely distinct from the shareholders. The true position of a shareholder is that on buying shares an investor becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to the Articles of Association, that the profits or any portion thereof should be distributed by way of dividends among the shareholders. He has undoubtedly a further right to participate in the assets of the company which would be left over after winding up but not in the assets as a whole as Lord Anderson puts it.
8. The High Court expressed the view that until a dividend is declared there is no right in a shareholder to participate in the profits and according to them the declaration of dividend by the company is the effective source of the dividend which is subject to tax. This statement of the law we are unable to accept. Indeed the learned Attorney-General conceded that he was not prepared to subscribe to that proposition. The declaration of dividend is certainly not the source of the profit. The right to participation in the profits exists independently of any declaration by the company with the only difference that the TA (AT) No. 18 & 114/2021 Page 77 of 104 enjoyment of profits is postponed until dividends are declared.
9. It was argued that the position of shareholders in a company is analogous to that of partners inter se. This analogy is wholly inaccurate.
Partnership is merely an association of persons for carrying on the business of partnership and in law the firm name is a compendious method of describing the partners. Such is, however, not the case of a company which stands as a separate juristic entity distinct from the shareholders. In Halsbury's Laws of England, Vol. 6 (3rd Edn.), p. 234, the law regarding the attributes of shares is thus stated:
"A share is a right to a specified amount of the share capital of a company carrying with it certain rights and liabilities while the company is a going concern and in its winding up. The shares or other interest of any member in a company are personal estate transferable in the manner provided by its articles, and are not of the nature of real estate."
(Emphasis Supplied)
47. It is specifically clear that the declaration of dividend is certainly not the source of the profit and any right to participate in the profit exists independently of any declaration by the Company. It is a settled proposition that a Shareholder cannot compel the Company by any process of Law to declare a dividend. Therefore, the contention of the Learned Senior Counsel for the Appellant that excess remuneration was eating into the profit of the Company thereby leading to a lower dividend, which he alleges is an act of Oppression, cannot be sustained, specifically keeping in view that a Shareholder of a Holding Company, cannot, TA (AT) No. 18 & 114/2021 Page 78 of 104 as a matter of 'Right' seek to be appointed as a 'Director' in a Subsidiary Company, in which he may not be a Shareholder, but instead the Appellant seeks the position of a 'Director', by virtue of his being a member of the Family. The exercise of the inherent right of the Shareholders in such circumstances, to elect their Director cannot be contended as constituting 'Oppression'.
48. In the facts of this case, we are of the considered view that there is an absence of an element of lack of probity or fair dealing in the matter of his proprietary rights as a Shareholder. The Rights of a Shareholder include voting on Resolutions at Meetings of the Company; electing Directors and participating in the management of the Company; enjoying the profits of the Company in the shape of dividends as and when declared by the Company; applying to the Court/Tribunal for relief in case of Oppression and Mismanagement; and in the case of winding up a share in the surplus. The Company was incorporated as a private limited Company on 22/12/1938 much prior to the Appellant having become a Shareholder. In this family-owned Company, it is seen that R2 and R3 of TA No. 18/2021 alone were the Directors till 2011 when R2 had passed away and R3 had become a Director from 25/09/1970, six years after he had inherited 20 % shares from his father in 1964. Even in cases arising under Section 210 of the Companies Act, 1948, it was provided that 'to make out a case for winding up under Section 238, the Petitioner has to show that the affairs of the Company were being conducted in a manner oppressive to him as a Member of the TA (AT) No. 18 & 114/2021 Page 79 of 104 Company, which means, as a Shareholder of the Company'. In 'Lundi Brothers Limited' (1965) (35 CompCases 827), it was held that 'It is not lack of confidence between shareholders per se that brings Section 210 into play, but lack of confidence springing from oppression of a minority by a majority in the management of the company's affairs, and oppression involves, I think, at least an element of lack of probity or fair dealing to a member in the matter of his proprietary right as a shareholder". Ultimately, the learned judge dismissed the petition on the ground that "His main grievance is, as he admitted in the witness box that he has been ousted as a working director. That, it seems to me, has nothing to do with his status as a shareholder in the company at all. The same thing is equally true in regard to his complaint that his remuneration as a director of the company has been reduced. That relates to his status as a director of the company, and not to his status as a shareholder of the company." In the facts of the instant case, having regard to the fact that the lack of confidence of the Appellant is grounded on the personal conduct of the Directors rather than a lack of probity in the conduct of the Company's affairs, we are of the considered opinion that the Appellant's proprietary rights as a 'Shareholder' are not affected in any manner.
Other Contentions of the Appellant:
49. The Learned Senior Counsel for the Appellant vociferously contended that the Appellant's genuine grievance is that the majority Shareholders of the first TA (AT) No. 18 & 114/2021 Page 80 of 104 Respondent Company who controlled the Subsidiary made themselves as Directors, earning huge remuneration, thereby oppressing the Appellant who is a minority and that being majority Shareholders, the decision as to who would be the Directors of the Subsidiary Companies is decided only by them and hence, it is a clear case of self-appointment; that even if there is no agreement to the effect that the Appellant has an equal right of participation, such a right of participation ought to be the natural consequence of equal inheritance of the entire shares in the Company; that this disparity in terms of getting themselves appointed in the Subsidiary Companies leaving the Appellant out of the board and earning huge remuneration is an act of oppression which the NCLT has not addressed to. It is also a specific allegation of the Appellant that after the death of A.Sivsailam in the year 2011 and also after filing C.P. 20/2012, his daughter Mrs. Mallika Srinivasan, continued to act in the same style and manner by appointing her daughter as the Director of the Subsidiary and fixing her remuneration at Rs. 6 Crores. It is not denied that Mrs. Lakshmivenu, the daughter of Mrs. S. Mallika is a graduate from Yale University and a Doctorate from Warwick University with 13 years of experience in the automotive industry holding Directorship in various listed Companies. It is not the case of the Appellant that her appointment as a Director in the Subsidiary Companies or the quantum of remuneration is against the provisions of Law. It is only their case that the Respondent self-
appointed their own family Members and benefitted thereby causing disparity as far as the Appellant is concerned. There is no documentary evidence on record TA (AT) No. 18 & 114/2021 Page 81 of 104 to establish that the remuneration is beyond the permissible limits of the Companies Act, 2013 or that the said remuneration was paid without the approval of the Board or the Shareholders of TAFE. Be that as it may, it is an admitted fact that the Appellant is not a Shareholder of TAFE and has also not chosen to lift the Corporate Veil to seek redressal of any such issues of the Subsidiary Companies.
50. The other acts of serious misappropriation raised by the Counsel for the Appellant is that the second daughter of the second Respondent was studying in Delhi and her expenses for a whole year at Oberoi Hotel was paid by the Respondent Company; that two valuable immovable Properties in Kotturpuram, Chennai belonging to the Group were transferred in the name of Mr. Sivasailam at written down value which is much less than the Market value; that Mrs. Mallika celebrated her family weddings in the registered office premises of R1 Company at a huge expense born by the Group; that a huge sum of Rs. 16 Crores was transferred from TAFE to Amco Batteries Limited though the value was less than Rs. 3.3 Crores even after revaluation. The Learned Counsel drew our attention to the Annual Reports for the years end in 31/12/1999 in support of his submission that the land was overvalued.
51. Prima facie it is seen that the allegation with respect to Rs. 16 Crores transferred from TAFE to Amco with respect to land, is a subject matter of the Subsidiary Companies and secondly, the registered Sale Deed dated 07/04/1997 TA (AT) No. 18 & 114/2021 Page 82 of 104 is part of the record which substantiates the investment of Rs. 16 Crores by TAFE Limited. It is the Respondent's case that the Appellant is neither a Shareholder in TAFE nor in Amco Batteries and that TAFE was a Shareholder in Amco Batteries and entered into a sale transaction for the land on Mysore Road for Rs. 15.24 Crores which was the market value and TAFE had paid the entire sum of Rs. 15.24 Crores including stamp and Registration charges, on account of which transaction Amco had recorded a profit of Rs. 15.18 Crores in his Books which consideration was used to reduce the VRS commitments. We find force in the submission keeping in view the Sale Deed which is part of the record. Further, this Tribunal does not find it a fit case to adjudicate this allegation as we are of the considered view that the Holding and the Subsidiary Companies cannot be treated as a single economic unit and that the Corporate Veil which was required to be lifted keeping in view the nature of the Companies and specifically the direction of the Hon'ble Supreme Court, was not adhered to.
52. The Learned Counsel representing Mrs. Mallika submitted that the first Respondent Company had always sponsored the studies of the family members and that the Appellant had also benefitted from study abroad programme, the only requirement being the family member has to come back and work with the Group again. It was part of the education and investment programme of the first Respondent. The contention of the Appellant that the first Respondent paid for the stay of the late Sister of the 24th Respondent herein, while she was studying TA (AT) No. 18 & 114/2021 Page 83 of 104 in New Delhi, is denied. We are of the considered view that merely because the R1 Company has paid for the study and expenses of R2's daughter, this act does not per se come within the definition of an act of oppression and mismanagement as defined under Sections 241 and 242 of the Act. Moreover, the Appellant has adopted accounts from 1984 till the filing of the Company Petition and therefore, raising this issue after several years, appears to be more of a family dispute, rather than an act of oppression. We are also conscious of the fact that the Respondent whose education and stay were sponsored by the Company, has, since expired.
53. As regarding the allegation that the weddings of the children of Mrs. Mallika Srinivasan were conducted in a lavish manner in the premises of the registered office of the first Respondent Company and the expenses being borne by the Company, which is alleged to be an act of misappropriation, we are of the considered view that conducting weddings of the members of the family in the residence of the 24th Respondent which is the registered office of the first Respondent Company, cannot be construed to be an act of misappropriation. It is also not denied that the registered office of the first Respondent Company at that point of time was the residence of the second Respondent and is a residential premise called 'Sudharma'. It is the Respondents' case that all the family weddings happened in the venue where the expenses in this case were borne by Mrs. Mallika Srinivasan. This allegation too does not fall within the ambit of the TA (AT) No. 18 & 114/2021 Page 84 of 104 definition of oppression and mismanagement as defined under Section 241 and 242 of the Act.
54. A specific allegation was also made on the basis of 'Panama Leaks' that Mr. Sivasailam and his family had stacked several hundreds of crores of Rupees in a Shell Company called Stanbridge Company Limited in a Tax haven Island. It is submitted that the NCLT shall not frame any such issues and that there was no discussion about these allegations. It is submitted by the Counsel for the Respondents that the required details were submitted to the concerned authorities. This Tribunal does not have any express jurisdiction to conduct any such investigation to enquire into these kinds of allegations. The Appellant may approach the concerned authorities, if so advised. As regarding the contention of the Appellant that two flats and one bungalow in Kotturpuram, Chennai, owned by one of the Subsidiaries of the first Respondent, were transferred in favour of the second Respondent at a price much below the market value, is not substantiated by any documentary evidence and is also in respect of a transaction in the year 2005, and in the absence of any specific material on record cannot be construed to be an act of oppression and mismanagement as defined under the Act.
55. At this juncture, we find it relevant to reproduce Sections 241 and 242 of the Companies Act, 2013, detailing what constitutes an act of oppression and mismanagement:
TA (AT) No. 18 & 114/2021 Page 85 of 104
241. (1) Any member of a company who complains that--
(a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company; or
(b) the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members.
may apply to the Tribunal, provided such member has a right to apply under section 244, for an order under this Chapter.
(2) The Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order under this Chapter.
242. (1) If, on any application made under section 241, the Tribunal is of the opinion--
(a) that the company's affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company; and
(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was TA (AT) No. 18 & 114/2021 Page 86 of 104 just and equitable that the company should be wound up, the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.
(2) Without prejudice to the generality of the powers under sub-section (1), an order under that sub-section may provide for--
(a) the regulation of conduct of affairs of the company in future;
(b) the purchase of shares or interests of any members of the company by other members thereof or by the company;
(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;
(d) restrictions on the transfer or allotment of the shares of the company;
(e) the termination, setting aside or modification, of any agreement, howsoever arrived at, between the company and the managing director, any other director or manager, upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case;
(f) the termination, setting aside or modification of any agreement between the company and any person other than those referred to in clause (e): Provided that no such agreement shall be terminated, set aside or modified except after due notice and after obtaining the consent of the party concerned;
(g) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under this section, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference;
(h) removal of the managing director, manager or any of the directors of the company;
TA (AT) No. 18 & 114/2021 Page 87 of 104
(i) recovery of undue gains made by any managing director, manager or director during the period of his appointment as such and the manner of utilisation of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims;
(j) the manner in which the managing director or manager of the company may be appointed subsequent to an order removing the existing managing director or manager of the company made under clause (h);
(k) appointment of such number of persons as directors, who may be required by the Tribunal to report to the Tribunal on such matters as the Tribunal may direct;
(l) imposition of costs as may be deemed fit by the Tribunal;
(m) any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should be made.
(3) A certified copy of the order of the Tribunal under sub-section (1) shall be filed by the company with the Registrar within thirty days of the order of the Tribunal.
(4) The Tribunal may, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the company's affairs upon such terms and conditions as appear to it to be just and equitable.
(5) Where an order of the Tribunal under sub-section (1) makes any alteration in the memorandum or articles of a company, then, notwithstanding any other provision of this Act, the company shall not have power, except to the extent, if any, permitted in the order, to make, without the leave of the Tribunal, any alteration whatsoever which is inconsistent with the order, either in the memorandum or in the articles.
(6) Subject to the provisions of sub-section (1), the alterations made by the order in the memorandum or articles of a company shall, in all respects, have the same effect as if they had been TA (AT) No. 18 & 114/2021 Page 88 of 104 duly made by the company in accordance with the provisions of this Act and the said provisions shall apply accordingly to the memorandum or articles so altered.
(7) A certified copy of every order altering, or giving leave to alter, a company's memorandum or articles, shall within thirty days after the making thereof, be filed by the company with the Registrar who shall register the same.
(8) If a company contravenes the provisions of sub-section (5), the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.
56. The Hon'ble Supreme Court in a catena of Judgments has observed that though Law has not defined what is oppression for purposes of this Section, it is left to the Courts to decide on the facts of each case whether there is such oppression which calls for action under this Section. The Hon'ble Apex Court in 'S.P Jain Vs. Kalinga Tools Ltd.' reported in [(1965) (35 CompCases 351)] has while discussing what constitutes oppression and Section 210 of the English Act noted as follows:
"14. We may in this connection refer to four cases where the new Section 210 of the English Act came up for consideration, namely, (1) Elder v. Elder and Watson [(1952) SC 49] (2) George Meyer v. Scottish Cooperative Wholesale Society Ltd. [(1954) SC 181] (3) Scottish Cooperative Wholesale Society Ltd. v. Meyer [(1958) 3 All ER 66] which was an appeal from Meyer case [(1954) SC 181] and (4) Re. H.R. Harmer Limited [(1958) TA (AT) No. 18 & 114/2021 Page 89 of 104 3 All ER 689] . Among the important considerations which have to be kept in view in determining the scope of Section 210, the following matters were stressed in Elder case [(1952) SC 49] as summarised at p. 394 in Meyer case [(1954) SC 181] :
"(1) The oppression of which a petitioner complains must relate to the manner in which the affairs of the company concerned are being conducted; and the conduct complained of must be such as to oppress a minority of the members (including the petitioners) qua shareholders. (2) It follows that the oppression complained of must be shown to be brought about by a majority of members exercising as shareholders a predominant voting power in the conduct of the company's affairs.
(3) Although the facts relied on by the petitioner may appear to furnish grounds for the making of a winding up order under the 'just and equitable' rules, those facts must be relevant-to disclose also that the making of a winding up order would unfairly prejudice the minority members qua shareholders.
(4) Although the word 'oppressive' is not defined, it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are 'treating the company and its affairs as if they were their own property' to the prejudice of the minority shareholders and in which just and equitable grounds would exist for the making of a winding up order ... but in which the 'alternative' remedy provided by Section 210 by way of an appropriate order might well be open to the minority shareholders with a view to bringing to an end the oppressive conduct of the majority. (5) The power conferred on the court to grant a remedy in an appropriate case appears to envisage TA (AT) No. 18 & 114/2021 Page 90 of 104 a reasonably wide discretion vested in the court in relation to the order sought by a complainer as the appropriate equitable alternative to a winding-up order."
15. Meyer case [(1954) SC 181] was between a parent company and a subsidiary company and it was held that "(1) when a subsidiary company is formed with an independent minority of shareholders, the parent company must, if engaged in the same class of business, conduct the affairs of the subsidiary, even though these are in a sense its own, in such a way as to deal fairly with the subsidiary; (2) that, if the parent company deliberately pursues a course calculated to destroy its subsidiary, with resulting loss to the minority shareholders, this may amount to oppression within the meaning of Section 210; (3) that the conduct of a majority shareholder may amount to oppression notwithstanding the fact that his own shares depreciate in value pro rata with those of the minority; and (4) that, even if the majority shareholder has virtually destroyed the substratum of the company by his oppressive conduct and it is conceded by all parties to be just and equitable that the company be wound up, the oppressed minority may nevertheless be entitled to a remedy under Section 210."
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18. These observations from the four cases referred to above apply to Section 397 also which is almost in the same words as Section 210 of the English Act, and the question in each case is whether the conduct of the affairs of a company by the majority shareholders was oppressive to the minority shareholders and that depends upon the facts proved in a particular case. As has already been indicated, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of Section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as TA (AT) No. 18 & 114/2021 Page 91 of 104 members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. It is in the light of these principles that we have to consider the facts in this case with reference to Section 397."
(Emphasis Supplied)
57. Likewise, the Hon'ble Apex Court has considered the scope and extent of Sections 397 and 398 of the Companies Act, 1956 in 'Needle Industries India Ltd' (Supra); 'Sangramsinh P Gaekwad' (Supra); 'V.S. Krishnan and Westfort Hi-tech Hospital' (Supra) and has held that 'Oppression' would be where the conduct is harsh, burdensome and wrong; where the action is against probity and good conduct and that an 'Oppressive Act', complained of, may be fully permissible under Law but yet be oppressive and that Oppression is basically a question of fact. In the instant case, even if the Appellant was treated in an unfair manner with respect to not being given Directorships in the Subsidiary Companies, this unfairness alone does not constitute Oppression as the Oppression complained of must be in the exercise of the Legal and Proprietary TA (AT) No. 18 & 114/2021 Page 92 of 104 Rights as a 'Shareholder'. As can be seen from 'S.P. Jain Vs. Kalinga' (Supra), the conduct of the majority Shareholders should be shown to be oppressive to the minority and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority Shareholders continuing upto the date of Petition, which is absent here. In the instant case, the Appellant had approved and signed the Minutes of AGMs with respect to Dividends, the Appointment of Directors upto the date of signing of the Petition. Any excessive remuneration cannot amount to an act of mismanagement. If a director of a Company were to draw remuneration to which he was not legally entitled or in excess of the remuneration to which he was legally entitled, this would not by itself amount to oppression, as held in 're Jermyn Street Turkish Baths Limited' (1971) 1 WLR 1042. It is further held in 'Smith and Ors. v. Croft and Ors.' (1986) BCLC 207 that any excessive salary paid by the Company to its Directors would not constitute an act of oppression.
58. The Learned Senior Counsel Mr. Aryaman Sundaram appearing for R24 to R26 submitted that the Appellant has shares only in R1 Company but his allegations are against the Subsidiary Companies for which the Corporate Veil has not been lifted and the Petition is maintainable only against the Holding Company and moreover, merely because they are Subsidiary Companies, it does not ipso facto be treated as a Single Economic Unit. We find force in the contention of the Learned Senior Counsel that it is the Board which ultimately TA (AT) No. 18 & 114/2021 Page 93 of 104 takes the decision and that meetings do not provide for Veto Rights. It is also brought to the notice of the Bench that the Appellant had filed a Civil Suit against his uncles for distribution of the property rights, which was dismissed. Ancestral property cannot be treated as coparcenary property and any rights emanating from the same cannot be a subject matter of Sections 241 and 242 of the Act. Section 152 of the Companies Act, 2013 deals with the Appointment of Directors. Save as otherwise expressly provided in the Act every Director is appointed by the Company in the General Meeting. At the cost of repetition, we are of the considered view that in the absence of any provision in the Articles of Association or any 'Agreement', the Appellant cannot be made a Director unless there is approval of the majority of the Shareholders, or the Articles provide for proportionate representation. We are also of the view that the Appellant does not have the Locus to seek restructuring of the Boards of the Subsidiaries where he is not a 'Shareholder'.
LEGITIMATE EXPECTATION
59. Lord Hoffmann in the matter of 'O' Neill & Anr. Vs. Philipps & Ors.' , (1999) 2 WLR 1092 has explained the term 'Legitimate Expectations' as hereunder:-
"6. Legitimate Expectations In In re Saul D. Harrison & Sons Plc. [1995] 1 B.C.L.C. 14, 19, I used the term "legitimate expectation", borrowed from public law, as a label for the "correlative right" to which a relationship TA (AT) No. 18 & 114/2021 Page 94 of 104 between company members, may give rise in a case when, on equitable principles, it would be regarded as unfair for a majority to exercise a power conferred upon them by the articles to the prejudice of another member. I gave as an example the standard case in which shareholders have entered into association upon the understanding that each of them who has ventured his capital will also participate in the management of the company. In such a case it will usually be considered unjust, inequitable or unfair for a majority to use their voting power to exclude a member from participation in the management without giving him the opportunity to remove his capital upon reasonable terms. The aggrieved member could be said to have had a "legitimate expectation" that he would be able to participate in the management or withdraw from the company. It was probably a mistake to use this term, as it usually is when one introduces a new label to describe a concept which is already sufficiently defined in other terms. In saying that it was "correlative" to the equitable restraint, I meant that it could exist only when equitable principles of the kind I have been describing would make it unfair for a party to exercise rights under the articles. It is a consequence, not a cause, of the equitable restraint. The concept of a legitimate expectation should not be allowed to lead a life of its own, capable of giving rise to equitable restraints in circumstances to which the traditional equitable principles have no application. That is what seems to have happened in this case."
60. In the case on hand, the Shareholders have not entered into any 'Association upon understating' that each of them who has ventured his capital will also participate in the management of the Company. It is only upon the existence of such an 'Association upon understanding', that the aggrieved member could be said to have an 'legitimate expectation' that he would be able TA (AT) No. 18 & 114/2021 Page 95 of 104 to participate in the Company or withdraw from the Company. A 'legitimate expectation' therefore, emanates from a 'Right' and is distinctly different from an 'anticipation' or a 'desire'.
61. The 'legitimate expectation' argument of the Appellant does not find place in corporate jurisprudence specifically in the absence of any agreement or understanding for joint management or a specific promise for any representation in the Board at the time of incorporation or investment into the Company. The Apex Court in the matter of 'Navjyoti Co-operative Group Housing Society V. Union of India', reported in (1992) 4 SCC 477, after considering the House of Lords decision in the matter of 'Council of Civil Service Unions v. Minister for the Civil Service', [1984] 3 All ER 935, held as follows :
"It may be indicated here that the doctrine of 'legitimate expectation' imposes in essence a duty on public authority to act fairly by taking into consideration all relevant factors relating to such 'legitimate expectation'. Within the conspectus of fair dealing in case of 'legitimate expectation', the reasonable opportunities to make representation by the parties likely to be affected by any change of consistent past policy, come in."
62. We are of the earnest view that 'legitimate expectation' for any participation in the Board cannot arise under Corporate Law without the mutual consent of the Shareholders and can be inferred only if it is founded on the sanction of law or custom or a precedent followed in regular sequence, which is not so in the instant case as the Appellant is unable to establish that there was any TA (AT) No. 18 & 114/2021 Page 96 of 104 'promise' of any position of Directorship in the Board, to construe that having such an 'expectation' is 'justifiable' and 'legitimate'. The Appellant's grievance that he has been unjustly treated by his family members, which cannot strictly constitute 'Oppression and Mismanagement' as defined under Section 397 and 398 of the Companies Act, 1956 or under Section 241 and 242 of the Companies Act, 2013. It would be advisable if any discrimination meted out to him is settled by way of mediation, if so advised. The Appellant's Claim for Office of Profit is promised of 'Legitimate Expectation', being a Member of the family. But at the same time, the Appellant is a Shareholder of only the first Respondent Company and hence, the Claim for such an 'Office of Profit' in the other Subsidiary Companies, does not arise as the appointments in the Subsidiary Companies are controlled by the respective Board of Directors in accordance with their respective Articles of Association and any inheritance of Shares does not automatically entitle any of the family members to automatic post of Directorship and therefore any 'Legitimate Expectation' by the Appellant, in the facts of this situation, whether he is not a 'Shareholder' in the Subsidiary Companies, cannot be justified.
BUYOUT OF SHARES
63. It is the main case of the Appellant that the powers of the Tribunal to grant relief under Sections dealing with Oppression and Mismanagement is very wide and can be granted even when Oppression is not made out. It is submitted that at TA (AT) No. 18 & 114/2021 Page 97 of 104 the stage of granting relief in an Application under these provisions, the final question that the Court should ask itself is as to whether the Order to be passed will bring to an end the matters complained of. The Learned Senior Counsel for the Appellant sought a direction to buyout the Appellant's shares at an appropriate fair market value to be assessed as on date by an independent valuer which would put an end to the matters complained of. It is contended that no prejudice would be caused to anyone by ordering a buyout as the Appellant is being kept under the thumb of the majority without being given an entry into the main business of the group or an exit therefrom. It is also contended by the Learned Senior Counsel that even when oppression is not made of, Orders can be passed in the interest of the Company. Whereas, it is the case of the Learned Senior Counsel Mr. Krishna Srinivasan, that a buyout cannot be directed for the reasons that the Company cannot be treated as a quasi-partnership; there is no deadlock or stalemate in the functioning of the Company; this 'buyout' prayer is sought for 13 years later in the second Petition and not initially. The Learned Senior Counsel Mr. Aryaman Sundaram vehemently contended that buyout of the Appellant's shares cannot be permitted as it must be established that the first Respondent and its Subsidiaries constitute a single economic unit and there should be a specific finding of Oppression and Mismanagement. It is submitted that even if the Articles of Association provide for a restriction on the transfer of Shares, the same cannot be used as ground for seeking the buyout of shares as a precondition for the same is proving that the Shareholder was subjected to some TA (AT) No. 18 & 114/2021 Page 98 of 104 wrongdoing. The relief sought relates to the shares that are subject matter of the Suites filed by the 24th Respondent and the Appellant before the Hon'ble Madras High Court in which the rights of the Parties are yet to be determined. It is argued that the 10 % shareholding of the Appellant does not cause a deadlock in the management or cause a total chaos in the management of the Respondent Company or its Subsidiaries. At this point, we find it relevant to examine this issue on the touchstone of the Law laid down by the Hon'ble Apex Court in 'MSDC Radha Ramanan Vs. Chandrashekar Raja' reported in [(2008) 6 SCC 750].
15. Ordinarily, therefore, in a case where a case of oppression has been made a ground for the purpose of invoking the jurisdiction of the Board in terms of Sections 397 and 398 of the Act, a finding of fact to that effect would be necessary to be arrived at. But, the jurisdiction of the Company Law Board to pass any other or further order in the interest of the company, if it is of the opinion, that the same would protect the interest of the company, it would not be powerless. The jurisdiction of the Company Law Board in that regard must be held to be existing having regard to the aforementioned provisions.
16. The deadlock in regard to the conduct of the business of the Company has been noticed by the Company Law Board as also the High Court.
Keeping in view the fact that there are only two shareholders and two Directors and bitterness having crept in their personal relationship, the same, in our opinion, will have a direct impact in the matter of conduct of the affairs of the Company.
17. When there are two Directors, non-
cooperation by one of them would result in a TA (AT) No. 18 & 114/2021 Page 99 of 104 stalemate and in that view of the matter the Company Law Board and the High Court have rightly exercised their jurisdiction.
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23. Sections 397 and 398 of the Act empower the Company Law Board to remove oppression and mismanagement. If the consequences of refusal to exercise jurisdiction would lead to a total chaos or mismanagement of the company, would still the Company Law Board be powerless to pass appropriate orders is the question. If a literal interpretation to the provisions of Section 397 and 398 is taken recourse to, may be that would be the consequence. But jurisdiction of the Company Law Board having been couched in wide terms and as diverse reliefs can be granted by it to keep the company functioning, is it not desirable to pass an order which for all intent and purport would be beneficial to the company itself and the majority of the members? A court of law can hardly satisfy all the litigants before it. This, however, by itself would not mean that the Company Law Board would refuse to exercise its jurisdiction, although the statute confers such a power on it.
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26. In a case of this nature, where there are two shareholders and two Directors, any animosity between them not only would have come in the way of proper functioning of the Company but it would also affect the smooth management of the affairs of the Company. The parties admittedly are at loggerheads. A suit is pending regarding title of the shares of the Company. A contention had been raised by the appellant before the Company Law Board that the first respondent having filed a wealth tax return as karta of Hindu Undivided Family, he not only has 50 % shares in the Company but also 50 % shares in the HUF;
whereas the contention of the first respondent in that behalf is that the appellant had already taken his half-share in the joint family property and the HUF mentioned in the wealth tax return pertains TA (AT) No. 18 & 114/2021 Page 100 of 104 to the smaller HUF which consists of himself and his daughters."
(Emphasis Supplied)
64. In this matter, the power of the Company Law Board to mould a relief was addressed to and it was categorically held by the Hon'ble Apex Court that though the Company Law Board has wide powers enabling it to grant diverse reliefs to keep the Company functioning, it should pass such an Order which for all intents and purposes, would be beneficial to the Company itself and majority of its Members. Undisputedly, the Respondent Companies are making profits and are solvent Companies and therefore, it is to be examined whether any direction sought for by the Appellant herein with respect to buy out of shares, would be in the interest of the Company and whether the interest of the Shareholders would also be safeguarded.
65. In the facts of the instant case, the Appellant is a minority Shareholder and the Company is not in a deadlock situation and having come to such a conclusion we are of the considered view that there is no case made out by the Appellant that there was any Oppression or Mismanagement as defined under Sections 241 and 242 of the Act and no direction can be given compelling the Respondents to purchase the Shares of the Appellant or for any buyout of shares. We are also conscious of the fact that the reliefs sought relates to shares that are subject matter of the Suits filed by the 24th Respondent and the Appellant before the Hon'ble Madras High Court in which the rights of the Parties are yet to be determined. TA (AT) No. 18 & 114/2021 Page 101 of 104 The Appellant has filed C.S. 745/1999 seeking partition of the estate of his grandparents, which is subjudice. Though the powers of this Tribunal under the Sections 241 and 242 of the Act is wide, the over-all objective of these Sections must be kept strictly in view and the marginal note of the said Section of this Act shows that the purpose of the Order of the Court in this Section is to give relief 'in case of Oppression'. Since we do not regard either the remuneration being paid to the Respondents in the Subsidiary Companies, or the allegation of the Appellant that he was not made a Director in the Subsidiary Companies or that the expenses incurred towards the 24th Respondent regarding the 'stay' or 'education', or the investment of Rs. 16 Crores by TAFE in Amco Batteries or the sale of the Properties at Kotturpuram to the second Respondent, to be defined as an act of Oppression, detrimental to the affairs of the Company, the substratum for passing any Order under Sections 241 and 242, is not available. Hence, this Tribunal, in this factual matrix, is of the earnest view that directing for buyout of the shares would not be justified or legally permissible. Only when there is a case of complete deadlock in the Company on account of lack of probity in the management of the Company and there is no scope of efficiently running the Company as a commercial concern, there would arise a case for winding up on just and equitable ground. In the instant case, undisputedly the Respondent Companies, both the Holding and the Subsidiary Companies are not in a position of complete deadlock, but instead are running smoothly and profitably (table @ Para 18 herein). The material on record establishes that the Holding Company is TA (AT) No. 18 & 114/2021 Page 102 of 104 a solvent Company and there is no documentary evidence on record to substantiate the plea of the Appellant that there was any complete lack of confidence against the majority Shareholders. To reiterate, any remuneration which is less than 11% of the net profits or even declaring a low dividend does not amount to Oppression and mere dissatisfaction on behalf of the Appellant does not justify interference by this Tribunal. There is no functional deadlock leading to a situation where the Members are unable to co-operate in the management of the Company's affairs resulting in a paralysis kind of situation. Therefore, this Tribunal is satisfied that 'the just and equitable proposition' cannot be made applicable in this case, where there is no irretrievable breakdown in trust and confidence, leading to a 'functional deadlock'. In the absence of any contractual right to demand any proportional representation in the Board, an Order in this direction is not justifiable. Moreover, facts arising subsequent to the filing of the Petition cannot be relied upon and the validity of the Petition will be judged on the facts existing at the time of the presentation of the Petition.
66. This Tribunal is of the considered view that there are no substantial grounds for concluding that there was any 'Oppression or Mismanagement' and therefore, the question of passing any Order directing buyout of shares, bringing to an end any matter complained of, cannot be done in the facts of this case. There is no case made out by the Appellant to exercise any equitable jurisdiction to grant such relief.
TA (AT) No. 18 & 114/2021 Page 103 of 104
67. For all the foregoing reasons, these Appeals, TA (AT) No. 18/2021 and TA (AT) No. 114/2021 fails and are accordingly dismissed. No Order as to Costs. All connected pending Interlocutory Applications, if any, are closed.
[Justice M. Venugopal] Member (Judicial) [Shreesha Merla] Member (Technical) 06/10/2023 SPR/TM TA (AT) No. 18 & 114/2021 Page 104 of 104